-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FOGdkw29NoWzNZ9c6BdRqPGY5bUDnyQFOc3wbKHA1OqYO3nmwAcztpbJ5r2sWl83 U6ivL1nFNm0gK/+lDb4TlA== 0000893220-97-000779.txt : 19970416 0000893220-97-000779.hdr.sgml : 19970416 ACCESSION NUMBER: 0000893220-97-000779 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970415 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROTEL INTERNATIONAL INC CENTRAL INDEX KEY: 0000854852 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 770226211 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10346 FILM NUMBER: 97581423 BUSINESS ADDRESS: STREET 1: 2040 FORTUNE DR STREET 2: STE 102 CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 4084358520 MAIL ADDRESS: STREET 1: 2040 FORTUNE DRIVE STREET 2: STE 102 CITY: SAN JOSE STATE: CA ZIP: 95131 FORMER COMPANY: FORMER CONFORMED NAME: CXR CORP DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K, MICROTEL INTERNATIONAL, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (X) Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 or ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period __________ Commission file Number 1-10346 MICROTEL INTERNATIONAL INC. (Exact name of registrant as specified in its charter) Delaware 77-0226211 4290 E. Brickell Street, Ontario, California 91761 (909) 391-4321 (Address of principal executive offices) (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, $.0033 par value None Securities registered pursuant to Section 12 (g) of the Act: None Title of Class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10- K or any amendment to this Form 10-K. [ ]. The aggregate market value of the voting stock at March 31, 1997 held by nonaffiliates was approximately $13,042,190. As of March 31, 1997 there were 9,305,127 shares of Common Stock, Par Value $.0033, outstanding. When used in this Form 10-K, the words "may," "will," "expect," "anticipate," "continue," "estimate,""project," "intend" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, operating costs and financial position. Prospective investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially than those included within the forward-looking statements as a result of various factors. DOCUMENTS INCORPORATED BY REFERENCE The definitive proxy statement in respect of the 1997 Annual Meeting of Shareholders of the Company is incorporated by reference into Part III of this Form 10-K. 2 Item 1. Business INTRODUCTION CXR Telcom Corporation ("CXR Telcom") was incorporated in l984 under the laws of the State of Delaware. In 1989, the stockholders adopted a plan creating CXR Corporation as a holding company for the stock of CXR Telcom Corporation and CXR S.A., its European subsidiary. CXR Corporation is also incorporated under the laws of the State of Delaware. At the annual meeting of shareholders on February 28, 1995, the majority of shareholders voted to change CXR Corporation's name to MicroTel International, Inc. ("MicroTel" or the "Company"). On March 26, 1997, MicroTel consummated a merger transaction (the "Merger") pursuant to which XIT Corporation ("XIT"), a New Jersey corporation, became a wholly owned subsidiary of MicroTel. In connection with the Merger, the principal executive offices of MicroTel have been relocated to 4290 E. Brickell Street, Ontario, California 91761. A description of the business of CXR Telcom and CXR S.A. is set forth immediately below and is followed by a description of the business of XIT. CXR TELCOM AND CXR S.A. CXR Telcom and CXR S.A. (collectively, "CXR") design, manufacture and market electronic telecommunications test equipment and data communications equipment, and perform network integration services. Their customers include AT&T, the Regional Bell Operating Companies ("RBOCS"), interconnect carriers, independent telephone operating companies, private communications networks, banks, brokerage firms and Government agencies. See Note 4 to the Consolidated Financial Statements for financial information regarding foreign versus domestic operations for CXR. 2 3 PRODUCTS Test Instruments TELECOM TEST INSTRUMENTS. The CXR telecommunications test instruments are part of the Information Superhighway and offer various options for the measurement of the transmission characteristics of telephone circuits. Most of these instruments are offered in portable versions; some have rack mounting options for permanent installation. Some are offered with either Bell-compatible (U.S.) or CCITT (European) measurement standards. The Model 100 Series Responders allow the RBOCS, interexchange carriers, such as AT&T, MCI, U.S. Sprint, etc., or end users to remotely and automatically monitor, and actively test the quality of their transmission facilities. These products are compatible with the AT&T Centralized Automatic Reporting on Trunk (CAROT) testing system and are used by common carriers and private network operators to test their circuit interfaces to the AT&T toll network. As a result of the AT&T divestiture of its operating companies and the trend towards user ownership of equipment, local telephone operating companies have been forced to develop their internal capacity to identify and isolate troubles in the network transmission facilities in both telephone company owned or subscriber owned equipment. The basic components of these network testing systems are a Near End responder (NER), a Far End responder (FER) and an access Switch. An NER is a device that acts as the master in a master slave concept. An NER initiates a test by transmitting a test message to the FER at the other end of the circuit. A series of tests are coordinated through a routine sequence controlled by a PC based "Autoroutining System" software program usually located at the master site or the control center. The system program generates reports for all the test data, exception reports, trouble tickets, and marginal performance lines. The 700 Series of Transmission test sets are used principally by the telephone companies to perform analog measurements on voice grade and wide band circuits applications involving Digital Data Service (DDS) and High capacity Digital Subscriber Loops (HDSL). The primary use of this product line is in metallic telephone loop qualification testing. The LEA 8000 Transmission Test Set is a product designed for qualifying, commissioning and maintaining digital baseband leased lines, mono and stereo radio channels and basic and primary rate voice and digital (ISDN) subscriber loops. It is capable of making at very high transmission speeds all of the necessary measurements according to the international CCITT recommendations. CXR is now completing development of a comprehensive new family of test sets incorporating powerful and cost-effective Digital Signal Processing (DSP) measurement technology. These designs are incorporated into a new series of general purpose instruments being sold as the model 5200 Universal Transmission Analyzer. This product combines into one instrument the capabilities of a Data Transmission Impairment Analyzer, a DS1 BERT Tester, 3 4 a VF Signaling Network Access Unit, a T-1 Channel access Test Unit and a DDS private line and switched digital service test product. CXR has developed an exceptional understanding of the telephone market and computer systems applications, including not only the market demand for testing and termination devices, but also, the competitive element factors as well. As a result, CXR is positioning itself to provide a family of products which satisfy the requirements of reasonable cost, high degree of reliability, ease of operation and a clear migration path for future enhancement upgrades. CXR's product line, based on its model 5200, consists of a highly modular device, encompassing a full gamut of testing functions, which works considerably better than competitive equipment costing much more. Sales are confined to small specialized areas within the maintenance organization of the telephone companies. The product is multi-processor based using the highly successful Intel X86 family, supported by a dual 32 bit Digital Signal Processor. The product operates through a customized, internally developed real-time operating system. The 5200 product line covers the specialized installation and maintenance of all circuits involving voice, signalling transmission, data 64Kb/s data, 1.5Mb/s data as well as the new emerging ISDN qualification testing. The 5200 is the first product of its kind to offer all these testing capabilities within one package. Its success is based on its simple operational format with a large easy-to-read LCD screen. The product is also powered by internal batteries, in order to accommodate special hard-to-reach environments. DATACOM TEST INSTRUMENTS. Datacom test instruments are used to test and monitor the performance of computers and communications equipment to insure proper function in receiving or transmitting data over wide area or local area networks. These Datacom instruments monitor, emulate and perform digital tests on protocol, code and transmission functions of computers, terminals, modems, multiplexers, front-end processors and other computer and communications equipment. The Datacom instruments manufactured and sold by CXR for testing wide area networks include the CXR Telcom 840A and 841A Network Signalling Analyzers. The 840A is a hand-held field service instrument having limited emulation capability and full monitor capability. The 841A is an easy-to-use field service tool used primarily by telecommunications carriers for installation and maintenance of the new Integrated Services for the Digital Network (ISDN). Additional software features include the capabilities to test and monitor the Common Channel Signalling System 7 (CCSS7) which is a worldwide standard protocol developed for the purpose of transmitting information between digital central office switches. It establishes which path the long distance call will take in routing the call. The 841A is ideal for central office use as well. Test instruments represented 35% of CXR sales for the year ended December 31, 1996, 28% of CXR sales for the year ended December 31, 1995, 31% of CXR sales for the six months ended December 31, 1994, and 41% of CXR sales for the year ended June 30, 1994. 4 5 Transmission Products CXR develops, manufactures, and sells a broad line of Anderson Jacobson ("AJ") modem products. These include modem models operating at data rates from 2400 bits per second (bps) through 33,600 bps. These are sold as rackmount modems for use at central communication/computer sites or as stand-alone modems at central communication/computer sites or as stand-alone modems for use at remote sites. All of the AJ models are "feature rich" modems that generally offer more capabilities and flexibility than competing products. The ability to transmit digital data to and from computers is an important element in the computer industry. Communications and data interconnect capabilities are fundamental requirements for maximization of computer systems uses. The large volume of information to be exchanged between computer networks in geographically disperse locations require rapid, accurate and economical communications capabilities and the AJ product line is designed to meet and satisfy such needs. The market for V.34 bis dialup 33,600 bps products is believed to be a major growth area and much of CXR's modem development effort is being concentrated on the V.34 bis, V.32ter and V.34 protocol, which include a 33,600 bps product line of modems with integral time division channels multiplexer ports. The AJ 14,400/19,200 series is a true V.32 bis/V.32ter compatible product line, with full duplex operation on standard dial-up lines or on 2- or 4-wire leased lines. The series features trellis coded modulation and local and remote echo cancellation, with capabilities to cope with satellite delay of multiple hops in long distance transmission. Also, the series is equipped with multiple number storage capacity via a V.25 bis synchronous dialer for computer controlled application. In leased line operation the series features unattended automatic dial backup using the dial-up network in the event of lease line failures. The series is also available in either stand alone desktop applications or as a card for chassis rackmount configuration. The AJ Smart Rack is a modem management enclosure that accommodates 16 modular card modems that allows the data center managers to keep track of configurations, diagnostics, alarms and system status at all times through a menu driven user interface. The main advantage of the Smart Rack is simplicity of keeping track with real time monitoring and reporting of all activities using simple easy to read display screens. Also an on-board modem allows access from remote locations and the ability to dial a predefined sequence of numbers for alarm reporting. The AJ 5900 series offers intelligent T-1 Channel Service Units which provide access to D4 and Extended Super Frame (ESF) on High Capacity Digital Service (HCDS), in either a single line or rack mount configuration. The AJ 5900 series offers a single termination interface to the Data Terminal Equipment (DTE), providing continuous monitoring for bipolar violations and multiple error events. The user can select thresholds for error rates, with separate levels for the network and the equipment. The series provide complete access to both the network side and the user side, along with the appropriate diagnostic tests in order to maintain network integrity. 5 6 CXR is also introducing a new product line, the AJ 6900 series for T1 and fractional T1 CSU-DSU application. These newly introduced products will provide for the direct interface between the customer's equipment and the T1 facilities. The AJ 6900 series will operate at any multiple 56K or 64K b/s, including current Frame Relay data rates. Built-in multiplexer ports allow simultaneous connections to a PBX or channel bank, which share the same T1 facility. The AJ 6900 series have an integrated Simple Network Management Protocol (SNMP) and therefore can easily be managed by any network management system using SNMP. Transmission products represented 44% of CXR sales for the year ended December 31, 1996, 62% of CXR sales for the year ended December 31, 1995, 61% of CXR sales for the six months ended December 31, 1994, and 38% of CXR sales for the year ended June 30, 1994. At the end of fiscal 1994 CXR sold its network management (NAMS), local area network testing (LAN) and protocol analyzer product line (Digilog Division) to Numerex Corporation. (See Note 3 to the 1996 Consolidated Financial Statements included elsewhere herein). Networking Systems In 1996, CXR S.A. formed a new business unit to market several lines of products used to build data and voice networks. All of these products are sourced from third-party vendors under distributorship or OEM arrangements. The "product" marketed to its customers is a turnkey solution using these products and includes network design, installation and maintenance. The product lines marketed consist of four primary types as follows: a) multiplexing equipment used to transport data, voice and local area network traffic over point-to-point leased lines and frame relay networks; b) statistical multiplexers, terminal servers and routers for local area network interconnections; c) data compression equipment used to compress and encrypt data streams prior to network access to maximize transmission speed and secure the transmission and to decompress and decipher upon transmission receipt; and d) ISDN routers used to link remote offices to corporate office local area networks. Networking system revenues for its first year were $2,807,000 or 17% of CXR sales for year-ended December 31, 1996. PRODUCT DEVELOPMENT AND ENGINEERING CXR's product development and engineering is critical in view of rapid technological innovation in the telecommunications industry. Currently 25 engineers and technicians are engaged in CXR's research and development efforts. During the year ended December 31, 1996 and the year ended December 31, 1995, engineering and product development costs were $2,612,000 and $2,373,000, respectively, of which $795,000 and $699,000, respectively, were capitalized. Amortization is calculated using the greater of the straight line method over three years or the ratio of the product's current revenues divided by its total anticipated revenues. For the six months ended December 31, 1994 6 7 and fiscal year ended June 30, 1994 CXR's engineering and product development costs were $659,000 and $2,960,000, respectively. These product development costs were related primarily to development of new telecommunications test equipment, trunk testing system products and data communications equipment. Current research expenditures are directed principally towards enhancements to the current test instrument product line and development of increased band width (faster speed) transmission products. These expenditures are intended to improve market share and gross margins, although no assurances may be given that such improvements will be achieved. CXR also makes use of the latest CAD (Computer Aided Design) equipment to design and package its products. This puts CXR in the position to take full advantage of the latest CAE (Computer Aided Engineering), and EDA workstation tools (Engineering Design Automation) to design, simulate and test its advanced product features or product enhancements for custom circuits and miniaturization purposes. With the above mentioned tools, product developments are turned around very quickly, keeping the highest quality and reliability integrated as part of the overall development process. This kind of capability also allows CXR to offer custom featured designs for the potentially expanding Original Equipment Manufacturers (OEM) customers, whose needs require the integration of CXR's products with their own. CUSTOMERS AND MARKETING Customers for CXR's products include AT&T, the RBOCS, international telephone companies and private communications networks. Data communications test equipment and modem equipment are purchased by telecommunications equipment manufacturers and used in the design, manufacture, installation and maintenance of the electronic equipment they provide. Network test equipment is purchased by the major long distance carriers. CXR sells its products through its own direct sales and marketing force and independent representative firms and distributors in the United States. It direct sells in the European Community through CXR S.A. Other international sales are made through independent representatives in various parts of the world. During the year ended December 31, 1996 and the year ended December 31, l995 no one customer accounted for 10% or more of net revenue. Net revenues for the six months ended December 31, 1994 included sales of 10% to one customer. Net revenues for the year ended June 30, 1994 included sales of 11% to one customer. COMPETITION CXR has numerous competitors in all of its product areas. In each product area there are competitors with greater technological, financial and marketing resources than those possessed by CXR. The ability of CXR to compete is dependent on several factors including price, technology, product performance, service and its ability to attract and retain qualified management and technical personnel. CXR's business is subject to rapid technological changes and the introduction of new products incorporating technological advances is vital to CXR's success. 7 8 BACKLOG CXR's business is not seasonal and its production capacity is sufficient to meet current customer demand. Backlog of firm, unshipped orders was approximately $1,268,000 at December 31, 1996, as compared to $682,000 at December 31, l995, $1,858,000 at December 31, 1994 and $1,598,000 at June 30, 1994. Backlog is not deemed a significant measure of CXR's business, as it has transitioned itself to become a Just-In-Time (JIT) provider, in order to be more responsive to its customer base. Market pressures and quick delivery requirements in the transmission product business area have necessitated the implementation of a forecasting system coupled with a material requirement planning process to accomplish this transition. The above change produced quicker deliveries, which resulted in better customer satisfaction and a smaller backlog as well. MANUFACTURING CXR purchases the electronic components required for the manufacture of its products from a number of vendors and has experienced no significant difficulties in obtaining timely delivery of components. At present, CXR Telcom's main manufacturing facility is located in San Jose, California and CXR S.A.'s main facility is located in Abondant, France. CXR has a vertically integrated strategy. Since manufacturing labor costs are less than 10% of total production costs, and there is ample facility space, there is very little to be saved by using outside contractors. Considering the overall scale volume of manufacturing for all the different products, the pursuit of offshore manufacturing is not at all practical. Because the production process involves a fairly straightforward electronic assembly, CXR achieves an incremental cost advantage through the use of limited automation. However, CXR spends considerable time on manufacturability in product design and therefore harvests the benefits associated with the lower costs and flexibility during the manufacturing process. An additional benefit of in-house manufacturing is the ability to support normal production with all the current design improvements as well as keeping track of the overall quality. CXR is certified by both AT&T and Bellcore organizations as a quality vendor and supplier of products and has obtained its full certification as an ISO 9001 member. EMPLOYEES As of December 31, 1996, CXR employed 121 persons, of which 69 are employed in the United States and 52 in France, as follows:
United States France ------------- ------ Manufacturing 27 12 Marketing & Customer Service 19 18 Research & Development 13 12 Administration 10 10
None of CXR's employees are represented by labor unions, and CXR has had no work stoppages. Management believes that its employee relations are good. 8 9 PATENTS AND TRADEMARKS CXR owns several patents and possesses certain trademarks and proprietary information, such as know-how and trade secrets it considers important to its business and which it intends to protect through all appropriate means, including legal action. CXR's business, however, is subject to rapid technology changes and it believes that its success is dependent upon skills in engineering, manufacturing and marketing rather than its patent position. CXR has, nonetheless, followed a policy of filing applications for patents on inventions which it considers significant. REGULATION The Federal Communication Commission ("FCC") has adopted regulations with respect to the interconnection of communications equipment with telephone lines and radiation emanations of certain equipment. CXR has complied with these regulations and received all necessary FCC approvals for its line of trunk testing equipment. As additional products require certification, CXR believes it will be able to satisfy all such future requirements. CXR believes it complies with environmental regulations since it assembles, rather than manufactures, electronic components and therefore discharges into the environment are believed to be negligible. XIT CORPORATION XIT is an international diversified electronics designer and manufacturer of custom interconnect products (assembled printed circuit boards, including chassis enclosures and front panels), digital switches, keypad and keyboard input products, cathode ray tube and flat panel display products, bare printed circuit boards, hybrid microelectronic circuits and electronic subsystems incorporating custom input and display products. Its sales and services are principally directed towards OEMs in the electronics industry, including manufacturers of communications equipment, industrial and business computers, automatic teller machines ("ATMs"), medical devices, industrial instruments and test equipment and aerospace and military products. XIT's various product lines are divided into two sectors. XIT's Components and Subsystem Assemblies Sector includes data input and display components and outsourced input and display subsystems (Subsystem Engineering and Manufacturing or SEM). The Circuits Sector includes electronic OEM circuits (printed circuit boards, hybrid micro-electronic circuits). XIT manufacturers and markets its products through its headquarters office in Ontario, California and its subsidiaries and divisions - XCEL Arnold Circuits, Inc. (printed circuit boards), XCEL Circuits Division (printed circuit boards), XCEL Etch Tek (printed circuit boards), Digitran Division (keypads, keyboards, digital switches and electronic subsystems), and HyComp, Inc. (thin film hybrid circuits and resistor networks). In addition, XIT has three wholly-owned foreign subsidiaries which assemble and market its products: XCEL Corporation Ltd., located in the United Kingdom (components and subsystem assemblies), XCEL Abbott Ltd., located in the United Kingdom (power supplies), and XCEL Japan Ltd., located in Japan (reselling XIT and third party sourced components and providing purchasing services to XIT). 9 10 XIT was incorporated in the State of New Jersey in 1972 and, after a period of time operating an unrelated business under a different name, changed its name to XCEL Computron Corporation in 1983 (and later to XCEL Corporation in 1986). In November of 1996, the Company changed its name from XCEL Corporation to XIT Corporation and qualified to do business under the tradename "XCEL Information Technologies Corporation" to better reflect the current nature of the Company's business operations. In August of 1981, XIT began developing video display products. Shipments of these products began in June 1983. In 1985, XIT expanded significantly through the acquisition of its Digitran Division from Becton Dickinson & Co. ("BD"). In 1991, XIT began a fundamental transition of its business operations by divesting $1.5 million in unprofitable bare printed circuit board volume for outside customers and $3.5 million in low margin standard keyboards. During that year, XIT relocated its corporate headquarters, its Digitran Division's input and display component business and its circuit division to California and focused its manufacturing on low volume, high margin double-sided and multi-layer boards. Commencing in that year, XIT has invested heavily in research and development in order to diversify its product line and reduce its dependence on military sales. Commencing in 1994, XIT began actively seeking acquisition candidates with complementary product lines. In July 1994, XIT acquired 84% of HyComp, Inc. ("HyComp") through an exchange of its shares of Common Stock. HyComp, formed in 1969, designs and manufacture hybrid circuits, resistor networks, and thin film components. These products have a variety of uses in military, aerospace, medical, computer, industrial control and communications electronics. HyComp's products are for high-reliability applications where they must withstand extremes of temperature, humidity, or environment. In December 1995 and January 1996, XIT acquired an additional 5% of HyComp Common Stock through an exchange of XIT Common Stock for HyComp common shares and XIT Common Stock for 100% of the HyComp Preferred Stock. In May 1995, XIT established a printed circuit board contract assembly operation, XCMD, in Philadelphia, Pennsylvania. This operation was part of Janbridge, Inc., that filed for bankruptcy in April 1995. XIT purchased certain work-in-process from Janbridge's bankruptcy trustee and retained a certain number of Janbridge's former employees. This operation is now being run at the Ontario, California facility as part of the SEM activity. In July 1995, XCEL sold its Computron Display Systems Division ("Computron"), based in Forest Park, Illinois, a manufacturer of higher cost custom color and monochrome displays, for $1.8 million. Computron was sold because XIT management perceived that the demand for its product lines would be declining, and because XIT's growth in this product area was expected to be derived from its low cost standard color cathode ray tube ("CRT") product line, branded XCEL-Lite, as well as a full range of flat panel products manufactured at its Digitran Division, rather than the existing Computron products. In September 1995, though a newly established wholly-owned subsidiary XCEL Arnold Circuits, Inc. ("XCEL Arnold"), XIT completed the acquisition of the assets of Arnold 10 11 Circuits, Inc., a LaHabra, California manufacturer of complex multi-layer, surface mount circuit boards used in sophisticated electronic equipment for the computer, communications, instrumentation and industrial controls industries. XCEL Arnold's circuit boards are currently used principally in cellular telephone infrastructure, but can also be used in workstations, desktop and notebook computers, computer networking products, storage devices and medical equipment. In April 1996, XCEL Arnold completed the acquisition of Etch-Tek, Inc., a manufacturer of quick turn and prototype quantities of double sided and high layer count multilayer printed circuit boards. Etch-Tek has been established as a division of XCEL Arnold, and operates as XCEL Etch Tek. XCEL Etch Tek is located in Concord, California and maintains a direct sales office in San Jose, California. In September 1996, XCEL Corporation, Ltd. ("XCEL UK"), XCEL's wholly owned British subsidiary, acquired Abbott Electronics, Ltd. ("Abbott") from a large international British corporation, Adwest Ltd. XCEL UK operates Abbott as a wholly-owned subsidiary of XCEL UK. Abbott specializes in the design and manufacture of high and low voltage, high specification, compact and micro-electronic power supplies to meet rugged environmental and high tolerance electrical requirements. Abbott's power supplies are AC or DC, and are packaged to meet the most demanding custom space and electrical requirements. The power supplies use the latest hybrid circuit technology which can be sourced internally from HyComp, rather than purchased from outside manufacturers. Also, the non-hybrid circuits which are built on printed circuit boards are sourced internally from XIT's Circuit Group's various circuit board manufacturing units. XIT's business plan is to integrate its input, display and printed circuit board components into subsystem assemblies for a select number of OEMs in a diverse range of industries, including communications, industrial, medical, aerospace and the military. In recent years, through the process of outsourcing (utilizing contract assemblers for manufacturing), OEMs have been able to reduce their investment in the facilities, equipment, personnel and technological and manufacturing know-how necessary to assemble systems. Outsourcing allows them to focus their efforts and resources on other areas such as product research and development and marketing. Through the Digitran Division, XCEL U.K. and XCEL Etch Tek, XIT offers complete manufacturing solutions, including concurrent engineering, assembly of printed circuit boards incorporating its input and display components, assembly of subsystems, test engineering, software development and accessory packaging. XIT believes that its ability to manufacture various electronic components, combined with its engineering integration capability, provides it with a number of competitive advantages in providing subsystem assemblies that can enable it to capture a significant portion of this burgeoning market. XIT's business strategy is to: (i) continue to capitalize on the benefits of operating as a vertically integrated electronics company; (ii) increase sales to existing customers; (iii) add new customers, products and services through technology implementation; (iv) leverage its customer base to generate increased subsystem assembly business; and (v) expand the sales of both component and subsystem assemblies by acquiring companies or establishing operations in new markets. 11 12 PRODUCT LINES XIT, through its various divisions and subsidiaries, designs and manufactures printed circuit boards, hybrid circuits, resistor networks and thin film components, data input and display devices and incorporates these devices into fully integrated front panels, control panels, and other electronic subsystems. A description of these products and subsystems follows: - Printed Circuit Boards. Circuit boards, also called printed circuit boards or printed wiring boards, are essential components in virtually all sophisticated electronic products. The circuit board is the basic platform used to interconnect and mount electronic components such as microprocessors, resistor networks and capacitors. Circuit boards consist of copper traces on an insulating (dielectric) base, which provide electrical interconnections for electronic components. The development of more sophisticated electronic equipment by OEMs combining higher performance and reliability with reduced size and cost has created a demand for increased complexity, miniaturization and density in the circuit traces. In response to this demand, multi-layer boards have been developed in which several layers of circuitry are laminated together to form a single board with both horizontal and vertical electrical interconnections. Further circuit board sophistication is currently being achieved by decreasing the width and separation of the traces, drilling smaller holes to connect the internal trace layers and precisely situating the traces and pads on the board surface to accommodate surface mount components. XCEL Arnold, XCEL Etch Tek and XCEL Circuits manufacture a full range of custom double-sided and multi-layer printed boards. XIT is MIL 55110 E, 94V-O, UL796 and ISO 9001 qualified. Boards can be produced as large panels, with deep gold plating, in small and large lot sizes and in a multitude of forms. XCEL Arnold specializes in high density, multi-layer printed circuit boards of up to 12 layers, produced using a variety of materials. The majority of the XCEL Arnold's multi-layer rigid circuit boards are manufactured on a standard base laminate material having broad functionality. XCEL Etch Tek produces commercial and military multi-layer boards up to 24 layers. XIT Circuits Division also produces high performance circuit boards constructed from specialty materials. High performance circuit boards are used in electronic products requiring high speed and high frequency interconnect solutions, such as cellular phone base stations and other communications, computing and instrumentation products. High performance circuits are manufactured using specialty materials with properties that address the need for faster speed, higher operating temperatures and higher frequencies. XCEL Arnold, XCEL Etch Tek and the XIT Circuits division have developed the expertise and specialized engineering processes required to manufacture high performance circuit boards using a broad range of materials, including Duroid(R), Cyanate Ester, GETEK(R) and Poly-Imed. XIT believes that it is one of the few merchant suppliers capable of producing high performance circuits using a combination of high performance base materials at acceptable quality and yield levels. 12 13 - Digital Switches. XIT's Digitran Division manufactures and sells a full line of military, industrial, and commercial switches. These products are thumb wheel, push button and lever modules or assemblies. The switches come in a variety of dial positions, assembly spacers, message units, markings and characters. Furthermore, the switches offer replaceable lighting, wire wrap terminals, RFI shielding and printed circuit board mounting. - Displays. XCEL UK's color and monochrome CRT and XCEL-Lite monitors, manufactured by the Digitran Division, come in a variety of screen sizes, from five to twenty-one inches. Each monitor is customized to meet the needs of OEMs or sold "off the shelf" as lower cost color standard XCEL-Lite models. The monitors also come with a range of options, including: a wide range of phosphors, customer headers, video to all standard formats or customized, front access controls for brightness, contrast, and power, ruggedized exteriors, EMI/RFI shielding, low energy power and universal power supplies. The predominant market segments for these displays are medical, test instruments and rugged continuous use ATMs. - Keypads & Keyboards. Beginning with the input of information, XIT offers a wide variety of custom keypads and keyboards. Its keypads, produced by the Digitran Division, are available in standard arrays of six (two rows of three), twelve (four rows of three), sixteen (four rows of four), or twenty (five rows of four or four rows of five) keys. In addition, these keypads can be especially designed in an almost unlimited variety of highly custom formats. XIT's keyboards produced by the Digitran Division are available with up to 123 keys and two LCD display options with touch screen user interfaces. The keyboards offer fully programmable LCD displays and menus with PC AT, RS-232, RS-422 or RS-423 system interfaces, along with two level adjustable audible feedback. XIT's patented capacitance keyboard switch design provides 100 million life cycles. - Subsystem Engineering and Manufacturing ("SEM"). By integrating the above described printed circuit boards and input and display components, XIT's Digitran Division and XCEL are able to engineer and manufacture a wide variety of communications equipment, medical testing equipment, industrial machine controllers, and military weapons subsystems. Various medical equipment and gasoline service point of sales terminals and machine tools use Digitran's proprietary PF-Shield, a thin, tough PolyFilm which provides environmental protection from dust, most fuels, solvents and petroleum based products, yet does not detract from its cosmetic appearance or function performance. Furthermore, the shield is highly resistant to puncture, remarkably flexible, stabilized, flame retardant and remains flexible from -75 degrees Celsius to 150 degrees Celsius. XIT's industrial machine controller products eliminate interference and cross-talk between adjacent monitors, utilize high grade plastics (Digidome) that will not deteriorate when exposed to petrochemicals, and offer custom panels and keycaps that withstand the abusive industrial environment. XIT's military products utilize the highest quality materials to withstand nuclear, biological, and chemical contamination and extreme environmental conditions encountered in worldwide military deployment including rigorous shock and vibration. 13 14 - Microelectronic Circuits. HyComp's hybrid circuits combine components, such as resistors, capacitors, and integrated circuit chips, into one functional unit in a single sealed package. Hybrid circuits have advantages in size, weight, performance ruggedness, and reliability over separate individual components. HyComp's resistor networks are interconnected groups of resistors with extremely accurately matched resistance values, connected in a single sealed package and used in high-precision analog circuits. HyComp's thin-film components include chip resistors, patterned substrates, and metalized wafers. They are sold to OEM manufacturers and other hybrid manufacturers who need the accuracy and small size of thin-film components, but do not have HyComp's experience or expertise in this technology. The predominant market segments for these circuits are communications, medical, aerospace and military. - Power Supplies. Abbott specializes in the design and manufacture of high and low voltage, high specification, compact and micro-electronic power supplies to meet rugged environmental and high tolerance electrical requirements. MANUFACTURING AND OPERATIONS XIT is a vertically integrated diversified international electronics manufacturer specializing in the following sectors: (1) bare printed circuit boards and high performance hybrid custom micro-electronic circuits; and (2) discrete data input and display components and custom integrated data input and display subsystems. An overview of the operations and manufacturing capability of its two market sectors follows: Circuits Sector XIT's printed circuit board operations (XCEL Circuits Group), are conducted by XCEL Arnold, XCEL Etch Tek, XCEL Circuits and HyComp. XCEL Arnold carries out its operations in a 45,000 square foot facility in La Habra, CA, XCEL Etch Tek is located in a 20,000 square foot facility in Concord, CA and XIT Circuits carries out its operations at a 10,000 square foot facility in Monrovia, CA. XCEL Arnold specializes in high density, multi-layer printed circuit boards of up to 12 layers, produced using a variety of materials. The majority of the XCEL Arnold's multi-layer rigid circuit boards are manufactured on a standard base laminate material. It also produces high performance circuit boards constructed from speciality materials. XCEL Arnold embraces Total Quality Management ("TQM") to meet the highest industry standards for product quality. XCEL Arnold gained ISO 9002 certification in 1995, when it was among the first independent circuit board operations in the United States to be certified to this level of international quality standards. XCEL Arnold has developed proprietary techniques and manufacturing expertise, particularly in the area of complex multi-layer, surface mount circuit boards. XCEL 14 15 Arnold has not patented these proprietary techniques and instead relies on trade secret protection. XCEL Arnold believes that although such techniques and expertise are subject to misappropriation or obsolescence, development of improved methods and processes and new techniques by XCEL Arnold will continue on an ongoing basis as dictated by the technological needs of the business. XCEL Etch Tek has been established as a division of XCEL Arnold, and trades as XCEL Etch Tek. XCEL Etch Tek is a manufacturer of sophisticated high multi-layer and quick turn and prototype printed circuit boards, and is located in a modern, well-equipped 20,000 square foot facility in Concord, California. HyComp manufactures products for high-reliability applications where they must withstand extremes of temperature, humidity, or environment. HyComp's hybrid circuits combine components, such as resistors, capacitors and integrated circuit chips, into one functional unit in a single sealed package. HyComp's engineering activities include design and process engineering, simulation, layout, CAD/CAE, and test software and hardware development. Production takes place in class 10,000 and class 100,000 clean rooms, with critical areas maintained at class 1,000. Production operations include photo lithography, deposition, laser trim, wafer sawing, substrate mount, wire bonding, assembly, trim, test, and environmental screening. HyComp's thick film hybrids are manufactured by HyComp's strategic partner SIMESA in its automated cassette to cassette production facility located in Vitoria, Spain. This facility is ISO 9001 certified, as well as meeting many other European quality standards. HyComp's US facility is certified and qualified to MIL-STD-1772, and manufactures to MIL-H-38534 and MIL-STD-883. Quality programs incorporate TQM and Statistical Process Control ("SPC"). Components Subsystem Assemblies Sector XIT's components operations are conducted by the Digitran Division, XCEL UK, Abbott and XCEL Japan, and subsystems engineering and manufacturing for outsourced Input and Display Subsystem assemblies (SEM) and other build-to-print assemblies are produced by the Digitran Division, XCEL UK and Abbott. XIT's Digitran Division manufactures and sells digital switch products serving principally the aerospace market, but also for communications, industrial and commercial applications. Thumbwheel, push button, lever modules, together with assemblies are manufactured in 16 different model families. XIT integrates its switch, data input and display devices with an extensive vertically integrated manufacturing capability. Its state of the art manufacturing and testing expertise provide quality and reliability. For the XCEL-Lite display monitor product, XIT designed, equipped and procedurized a color monitor production line. XIT increased production volume by 30% and improved product quality and reliability. UL, CUL and TUV certifications were awarded to the product. Overhead support functions were integrated into an XCEL-Lite production line. 15 16 Customer returns were reduced by increasing quality and incorporated production efficiencies by initiating Just-in-Time ("JIT") SPC and build-to-box assembly methods. In its SEM manufacturing, XIT uses a variety of advanced technologies and processes and offers complete manufacturing solutions, including concurrent engineering assembly of complex printed circuit boards and other electronic assemblies, test engineering, software design, accessory packaging and post manufacturing services. As electronic products evolve to meet customer demands for increased functionality and performance in smaller, more complex packages, XIT's manufacturing technologies and processes are evolving from surface mount technology to include tape automated binding, full grid arrays, chip on board chip in flux and emerging technologies such as flip chip and multi-chip modules. Abbott brings in-house all high voltage and low voltage power supply requirements for XIT's telecommunications, aerospace, military, medical and industrial displays and other information-based products. Approximately 75% of Abbott's total sales are for aerospace and military customers. The remaining 25% is almost exclusively for communications information systems applications. Thus, Abbott's product applications fit neatly with XIT's goal to expand its information technology business. Abbott currently sells its products and services throughout Europe and to a lesser extent in the U.S. XIT intends to expand Abbott's U.S. presence through support for Abbott by XIT's U.S. based sales and marketing staff. Summary As part of XIT's commitment to continuous improvement, XIT has instituted a corporate-wide quality assessment program in all departments throughout its manufacturing operations. To date, XIT has received ISO 9000 certification for XCEL Arnold and is in the final phase of certification for XCEL UK. Preparatory work is underway to certify the Digitran Division for switch and other input devices along with the XIT-Lite display product line. XIT believes that its proactive corporate-wide mandate to continually analyze and improve all processes will enhance XIT's ability to build quality into all of its component products and subsystem assemblies. XIT integrates the diversity of its manufacturing facilities to produce high quality products at a price OEMs can afford. XIT has administrative, design and development and manufacturing facilities on both the East and West Coasts. For worldwide support, XIT can offer services from its European and Japanese sales and manufacturing facilities. XIT's design team acts as an extension of its customer's development teams to shorten their design and manufacturing time, reduce their vendor coordination and minimize their capital equipment requirements. From concept through design, from prototypes to full production, XIT's goal is to offer the complete solution: an integrated, fully tested, reliable product built from the bare printed circuit board on up. 16 17 MARKETING AND SALES XIT's marketing and sales program is designed to ensure continuous working relationships with its customers early in the design phase of the customer's product development. XIT uses a technical sales approach in which each salesperson has back-up from an engineer to provide technical support to the customer. This approach also creates a basis for upgrading equipment, developing processes and maintaining a position of technological leadership. Circuits Sector In its circuits sector, XIT's customers include a diversified base of leading OEMs in the communications, industrial instrumentation and computer market segments of electronics. These customers often employ leading edge technologies and their product requirements generally drive the advancement of electronic interconnect manufacturing technology. Currently, XCEL Arnold's largest customer is the Cellular Infrastructure Group of Motorola, accounting for approximately 55% of XCEL Arnold's sales (and 41% of XIT's overall sales) for the fiscal year ended September 30, 1996, XIT's first full year of ownership. The Cellular Infrastructure Group manufacturers the equipment that goes into a cellular base station including towers, mobile telephone switching offices, cell site equipment and microwave equipment. XIT recognizes that its Circuit Group must decrease its dependence on Motorola and rapidly expand XCEL Arnold's customer base. XIT intends to accomplish this through the acquisition of other printed circuit board companies and by directing its sales and marketing efforts to other OEMs. In addition, XIT's direct sales force from its other operations are now selling XCEL Arnold's bare printed boards. By this activity, XIT expects to reduce the Motorola concentration. Components and Subsystem Assemblies Sector XIT's components sector is accelerating its discrete digital switch sales growth by providing value-added integrated SEM assembly of the entire switch panel assembly and by providing other components attached behind the switch. In the keyboard and keypad product areas, the Digitran Division has developed specialized ruggedized and sealed high margin keyboards capitalizing on Digitran's existing patented keyboard innovations. XIT's growing line of color XCEL-Lite CRT and flat panel display products include color displays for the banking and industrial equipment markets. This product line has been evolving in conjunction with this industry trend. U.S. and foreign financial institutions such as banks have been steadily replacing old ATM machines with newer, more advanced models as banks strive to replace costly tellers and back-office personnel. In addition, ATMs are evolving beyond their original role as mere cash dispensers and deposit takers and in the future will do such things as issue theater tickets and travelers checks and dispense medications. Capitalizing on its existing people and product strengths, XIT has created an SEM capability that serves the data input and display integration requirements specified by its customers. XIT's expertise in the design engineering and manufacturing of stand-alone discrete 17 18 data input and displays is the foundation for a new market for integrated fully assembled data input and display subsystem assemblies. It is a market where XIT believes it has proven the need and believes there are few commercial domestic competitors positioned to participate. Those who do participate tend to be high-cost speciality military-oriented competitors. To serve the market, XIT integrates for its customers discrete components for which its divisions already have individual name recognition and proven specialty products. XIT's products and subsystems are marketed through a sales engineering staff that provides technical support, product training and pricing services by various direct salespersons, sales representatives and distributors. The digital switch and other input devices are sold through a direct sales engineering staff and four distributors. CRT and flat panel displays and SEM are sold through direct sales engineers. Printed circuit boards are sold through XIT's direct sales force and several independent sales representatives, while HyComp products use twelve representative firms. In Europe, sales are generated by ten sales representatives and a direct sales engineering staff. In Japan, XIT uses a direct sales engineering staff as well as five distributors. Along with its various marketing and sales programs, XIT has recently established a World Wide Web site (address: http://www.XITcorp.com), promoting Digitran digital input devices, XCEL-Lite displays, and SEM subsystems. Additionally, HyComp has established a Web site in support of its hybrid microelectronic circuits and eventually will have a site for its new technology, epoxy flip-chip multichip modules and assemblies. XCL and XCEL Japan are also on the Internet. RESEARCH AND DEVELOPMENT The research and development efforts of XIT are focused on internal and customer designs and requirements. XCEL Arnold, XCEL Etch Tek, the Digitran Division, HyComp and XCEL UK offer value-added engineering design services that range from concurrent engineering to total product assembly. To meet customer demands for reduced cycle time in the development process, XIT has continued to invest in electronic design automation and synthesis tools. This equipment allows XIT's engineers to work at a more conceptual level. As a result, XIT's project teams can quickly try out alternative design approaches once and thereafter synthesize the design into the selected technology automatically. The automation provided by these tools significantly shortens the development cycle while improving cost and quality. These tools allow XIT to pursue designs which could not be attempted with less sophisticated tools and methods. In 1993 and 1994, XIT invested approximately $1.5 million in research and development to accelerate the introduction of new non-military products. With this investment, XIT has been able to capture new industrial business to more than offset the drop in military volume experienced since 1992. In 1992, HyComp began investigating a lower cost alternative flip chip assembly process than that developed by IBM in the 1980s. The HyComp process called "adhesive flip chip" uses conductive adhesives as interconnections, instead of deposited metals. The adhesive 18 19 flip chip process promises all the benefits of flip chip, but with substantially lower capital investment and manufacturing costs. In 1995, HyComp received a $750,000 contract from the Advanced Research Projects Agency of the Department of Defense ("ARPA") to set up and operate an adhesive flip chip assembly line. In microelectronic applications, packaging has become a primary focus. As chips approach the limits of on-chip densities, packaging, which space chips closely, becomes key to increasing performance while decreasing size. Flip chip technology gives the highest chip density of any packaging method. Instead of placing chips in space wasting individual packages, they are assembled face down onto matching connections on a substrate or board. Since the connections are under the chip, no additional space is required for bonded wires or leads. XIT's and HyComp's management believe that adhesive flip-chip has significant potential size, performance and cost advantages for hybrid circuit manufacture. It is expected that the two year ARPA program will make HyComp the only hybrid company experienced in adhesive flip chip assembly, a significant market advantage. HyComp's management expects that over the next five years, flip chip will be the microelectronic packaging of choice for high performance circuits. A prototype production process and initial samples are expected by June, 1997 with production orders to follow in three months from that time. PATENTS AND TRADEMARKS XIT regards its software and hardware as proprietary and relies primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions, including employee and third-party nondisclosure agreements, to protect its proprietary rights. XIT seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford some limited protection. The laws of some foreign counties do not protect XIT's proprietary rights to the same extent as do the laws of the United States. XIT requires that its employees enter into confidentiality agreements. COMPETITION The electronic product and systems market is intensely competitive and characterized by rapid technological changes and frequent introductions of new systems and products. A whole myriad of companies currently offer systems and products that compete directly or indirectly with one or more of XIT's products or subsystems. XIT's ability to be competitive depends on such factors as price, quality of service, technological support and service, product development capability, marketing, distribution channels and the quality and expertise of its personnel. The market for printed circuit boards in the United States is fragmented and very competitive. There are over 700 companies producing circuit boards in the United States. XIT competes primarily against other merchant manufacturers. There are no dominant manufacturers in the segment of the industry served by XIT and XIT believes that relatively few producers in the United States have the technological competence, manufacturing processes, and facilities to produce complex multi-layer surface mount circuit boards in commercial volumes. The primary 19 20 competitor of XCEL Arnold is Hadco Corporation of Salem, New Hampshire, a leading supplier of electronic interconnect products and services. XIT also faces competition from certain captive circuit board manufacturers such as IBM. These manufacturers may seek orders in the open market to fill excess capacity, thereby increasing price competition. A number of XIT's competitors are larger than XIT and have greater financial, marketing and other resources. The market for printed circuit boards as well as HyComp's microcircuits is characterized by competitive factors such as product quality, technological capability, responsiveness to customers in delivery and service, and price. XIT believes that competition in the market segments served by XIT is based on product quality, delivery and price. XIT competes on the basis of the customer's total cost of acquisition, which includes tangibles such as unit cost and quality and intangibles, such as flexibility, capacity forecasting, responsiveness and dedication to customer satisfaction. XIT's SEM manufacturing competes in a highly fragmented market composed of a diverse group of U.S.-based manufacturers. XIT believes that the primary bases of competition in its markets are capability, price, manufacturing quality, advanced manufacturing technology, and reliable delivery. XIT's principal competitor is IEE Electronics, Inc. Many of the largest contract manufacturers such as Solectron and SCI operate high-volume facilities and focus on target markets, such as the computer industry, that XIT does not serve. XIT believes that by focusing on low to medium-volume production, and by manufacturing subsystems using its inhouse manufactured components, XIT can compete effectively. Additionally, by taking on a wider range of systems than its larger competitors and by having access to a diversified customer base, XIT believes it is able to diversify its workload and is not as dependent as some of its competitors on individual contracts, customers or industries. EMPLOYEES As of December 31, 1996, XIT employed approximately 390 persons, broken down between corporate and its subsidiaries and divisions as follows: XIT Corporate 52 XCEL Arnold Subsidiary 110 XIT Circuits Division 15 Digitran Division 110 HyComp Subsidiary 32 XCEL UK 16 XCEL Abbott 46 XCEL Japan 9 --- TOTAL 390 20 21 XIT has no collective bargaining agreements covering any of its employees, has never experienced any material labor disruption and is unaware of any current efforts or plans to organize its employees. XIT considers relations with its employees to be excellent. GOVERNMENT REGULATION, SAFETY, ENVIRONMENTAL COMPLIANCE XIT's business is not regulated in the jurisdictions in which it does business except for general business regulation and taxation applicable to businesses. XIT's business is subject to certain federal and state statutes governing safety and environmental protection. XIT believes that it is in substantial compliance with all such regulations and XIT is not aware of any proposed or pending safety or environmental rule or regulation which, if adopted, would have a material impact on its business or financial condition. Item 2. Properties PROPERTIES CXR Telcom's executive offices and CXR Telcom's manufacturing facilities are located in a leased building containing approximately 40,000 square feet of floor space in San Jose, California. This lease expires July 1997 and it is anticipated that it will be renewed. CXR S.A. leases an aggregate of approximately 12,000 square feet in France. This lease expires May 1998. All leased facilities are leased from unaffiliated third parties. CXR owns a 13,000 square foot facility in Abondant, France which is used for manufacturing and engineering of all of its European products. XIT operates in the following facilities which are all leased, other than the Melbourne facility which is owned by XCL, and the Ontario facility which is owned by Capital Source Partners, a California partnership in which XIT holds a 50% interest: Headquarters Office 10,000 sq. ft. Ontario, CA Digitran Division 53,000 sq. ft. Ontario, CA Office/Factory XCEL Circuit 10,000 sq. ft. Monrovia, CA Division Office/Factory XCEL Corp. Ltd. 10,000 sq. ft. Melbourne, Royal Office/Factory Herts, UK
21 22 Headquarters Office 10,000 sq. ft. Ontario, CA XCEL Abbott Ltd. 25,000 sq. ft. Ashford, Kent Office/Factory UK XCEL Japan, Ltd. 6,000 sq. ft. Higashi-Gotanda, Office/Assembly Tokyo XCEL Arnold, Inc. 45,000 sq. ft. La Habra, CA Office/Factory HyComp, Inc. 20,000 sq. ft. Marlborough, MA Office/Factory _______________ Total 179,000 sq. ft. ===============
The Company believes its facilities provide adequate capacity for its manufacturing, engineering and related marketing and administrative activity at present and for the anticipated future. Item 3. Legal Proceedings In September, 1994 Raymond Jacobson, a former director of MicroTel, brought an action against MicroTel in the California Superior Court, Santa Clara County, alleging that MicroTel has breached its contract to pay Mr. Jacobson $3,495 bi-weekly for life under a deferred compensation agreement dated May 11, 1993 (the "1993 Agreement"), by discontinuing payment in August 1994. The 1993 Agreement superseded a previous deferred compensation agreement dated April 1, 1977 (the "1977 Agreement") which had provided for twice the level of payments. Mr. Jacobson was claiming damages of approximately $1,200,000 which he purported to be the present value of all payments to be made under the 1993 Agreement. In June 1995 MicroTel paid Mr. Jacobson all amounts past due under the contract plus interest and reinstated the bi-weekly payments. On May 20, 1996, Daniel Dror & Co., Inc. ("DDC"), instituted a suit against Raymond Jacobson in the District Court for Galveston County, Texas alleging damages arising from DDC's investment of more than $2,000,000 for the purchase of 1,072,000 shares of the Company's common stock. On February 11, 1997, Raymond Jacobson, through his attorney, demanded that the Company indemnify him, hold him harmless and pay for the cost of defense, including reasonable attorney's fees and costs in connection with the litigation instituted against him by DDC. The Company believes that it has a reasonable basis to deny Mr. Jacobson's claim for indemnification in part or in whole. On February 14, 1997, Mr. Jacobson, through his attorney, gave notice to the Company that he believed that the litigation instituted against him by DDC provided a basis for him to rescind the 1993 Agreement and assert his rights to full payment under the 1977 Agreement. The Company's litigation counsel believes that while Mr. Jacobson's allegations may be sufficient to withstand a summary motion for dismissal of the claim, no conclusion can be drawn as to his likelihood of success on the merits of the claim. Notwithstanding the above, Company management and Mr. Jacobson have conducted settlement discussions since June 1996, and the Company believes that an enforceable settlement was reached on January 22, 1997. Mr. Jacobson apparently disclaims this agreement based on the actions noted above. On February 28, 1997, the Company filed a motion for continuance to 22 23 file a counterclaim that the January 22, 1997 agreement supersedes all previous agreements with Mr. Jacobson. A court supervised settlement conference with Mr. Jacobson was held on March 26, 1997. Although a tentative settlement was reached, the settlement was subject to fulfillment of a number of conditions subsequent. If one or more of these conditions subsequent are not satisfied, the settlement will not be binding on the parties. A trial in the matter has been scheduled for August 25, 1997. The Company does not believe that the value of any settlement in the matter will be materially in excess of amounts already recorded by the Company for the deferred compensation arrangement. In October 1996, David Scheinfeld brought an action in the Supreme Court of the State of New York, County of New York, to recover monetary damages in the amount of $300,000 allegedly sustained by the failure of MicroTel, its stock transfer agent and its counsel to timely deliver and register 30,000 shares of Common Stock for which payment had been made. The Company was informed by David Scheinfeld that in order to settle his claims, the Company would have to issue him unrestricted shares of common stock. Since the Company can not issue unrestricted shares (absent registration), the Company has answered Mr. Scheinfeld's motion and is seeking to compel him to serve a complaint upon the defendants. The Company and its subsidiaries are subject to other legal proceedings and claims which have arisen in the ordinary course of business. Although the ultimate outcome of these as well as the matters noted above cannot be predicted with certainty pending actual resolution, in the opinion of management, the disposition of these matters will not have a material adverse effect on the consolidated financial statements. Item 4. Submission of Matters to Vote of Security Holders There were no matters submitted to a vote of security holders during the quarter ended December 31, 1996. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters (a) Market Information: Since September 11, 1996, the Company's Common Stock has been trading on the NASDAQ SmallCap Market under the symbol MCTL. Prior to that date, the shares of the Company's Common Stock had been listed on the American Stock Exchange under the symbol MOL. Accordingly, the tables below reflect the high and low sales prices for a share of the Company's Common Stock during the period they were listed on the AMEX, and the high and low bid information for the period during which they were listed on the NASDAQ SmallCap Market. The quotations below for dates commencing September 11, 1996 reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions, and may not represent actual transactions. 23 24 On August 15, 1996, the shareholders of the Company ratified a one for five reverse stock split effective for holders of record on August 29, 1996. The sales prices below have been restated to give effect to the reverse split.
Year Ended Year Ended December 31, 1996 December 31, 1995 Quarter High Low High Low - ------- --------------------------- ------------------------ 1st $9.375 $5.3125 $4.375 $3.125 2nd 8.750 4.6875 6.25 3.75 3rd 5.625 3.125 7.50 5.3125 4th 3.25 1.0625 6.5625 4.0625
(b) Shareholders: As of March 31, 1997, the Company had approximately 3700 shareholders of record. (c) Dividends: The Company has not declared or paid any cash dividend since its inception. It has been the general policy of the Board of Directors to retain all earnings in the Company to support the expansion and development of new products. (d) Recent Sales of Unregistered Securities: On April 14, 1997, the Company sold $5.0 million of investment units consisting of one share of Common Stock and one-quarter of a warrant to purchase one share of Common Stock. The number of investment units sold was 2,000,000 and the Company realized net proceeds of $4,400,000 from the sale. No underwriter was used. The securities were sold to non-U.S. investors who were primarily European institutional investors. The investment units were sold pursuant to Rule 903 of Regulation S and qualified for such exemption based upon the following: (i) the investment unit purchasers were represented to the Company in the Subscription Agreements that they were non-U.S. Persons; (ii) the Company is a Reporting Issuer (as defined in Rule 902(l) of Regulation S); (iii) the Company has not made any Directed Selling Efforts (as defined in Rule 902(b) of Regulations S); (iv) the Company has implemented Offering restrictions (as defined in Rule 902(h) of Regulation S); (v) the Company has not made any offer of sale to any U.S. person or the account or benefit of any U.S. person; (vi) the offer and sale of the investment units were made in Offshore Transactions (as defined in Rule 902(i) of Regulation S). The Company did not sell any unregistered securities during the fiscal year ended December 31, 1996. 24 25 Item 6. Selected Financial Data MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA (In Thousands Except Per Share Amounts and Employees)
Six Months Year Ended Dec. 31 Dec 31 Fiscal Year Ended June 30 1996 1995 l994 1994 l993 - --------------------------------------------------------------------------- Sales $ 16,303 $ 18,352 $ 9,931 $ 21,648 $ 25,123 Net Income (Loss) $ (4,597) $ (667) $ 298 $ (639) $ (6,909) Net Income (Loss) Per Share $ (1.65) $ (.25) $ .15 $ (.39) $ (4.47) Total Assets $ 9,319 $ 11,325 $ 11,806 $ 11,322 $ 11,539 Long-term Obligations $ 543 $ 1,075 $ 2,022 $ 1,327 $ 1,872 Stockholders' Equity $ 2,776 $ 4,956 $ 4,978 $ 4,614 $ 4,341 Shares Outstanding at Year End 2,940 2,751 2,608 1,939 1,546 Employees at Year End 121 131 l40 l48 170
No cash dividends were declared during any of the periods presented. On August 15, 1996, the shareholders of the Company ratified a one-for-five reverse split effective for holders of record on August 29, 1996. Share and per share data above and in the Management Discussion and Analysis of Condition and Results of Operations following have been restated to give effect to the reverse split. 25 26 Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations On March 26, 1997, XIT Corporation ("XIT") of Ontario, California merged with a wholly-owned, newly formed subsidiary of the Company, with XIT as the surviving subsidiary. Pursuant to the transaction, the former shareholders of XIT were issued approximately 6,199,215 shares of common stock of the Company, or approximately 65.8% of the issued and outstanding common stock. In addition, holders of XIT stock options and warrants collectively have the right to acquire an additional 2,153,240 shares of MicroTel Common Stock. Collectively, then, the former XIT shareholders own, or have the right to acquire, approximately 65% of the Common Stock of the Company on a fully-diluted basis as of the date of the transaction. The merger will be accounted for as a purchase of the Company by XIT in a "reverse acquisition" because the existing shareholders of the Company prior to the merger will not have voting control of the combined entity. In a reverse acquisition, the accounting treatment differs from the legal form of the transaction, as the continuing legal parent company, the Company, is not assumed to be the acquiror and the financial statements of the combined entity are those of the accounting acquiror (XIT), including any comparative prior year financial statements presented by the combined entity after the business combination. Therefore, the Consolidated Financial Statements herein and the following discussion thereof will not appear in future Annual Reports of the Company. Rather, the separate financial statements of XIT for periods prior to the merger will be included in future financial reports of the Company. Presented in Note 13 to the Consolidated Financial Statements are unaudited proforma results of operations as if the companies combined at the beginning of each of the last two years. This information is for illustrative purposes only and does not purport to be indicative of the results that would have occurred had the merger taken place at those dates or of results which may occur in the future. A summary of XIT's separate results of operations used in the pro forma data and summary balance sheet data for XIT as of its fiscal year ended September 30, 1996 are as follows (in thousands):
Fiscal Year Ended September 30, 1996 1995 - -------------------------------------------------------------------------------- Net sales $31,248 $19,602 Net income 1,142 396 Total assets 20,524 Long term obligations 3,723 Stockholders' equity 6,550
26 27 RESULTS OF OPERATIONS FISCAL YEAR CHANGES Effective December 31, 1994, the Company changed its year end from June 30 to December 31 to better align its financial reporting cycle with the business cycle of its products. Accordingly, the audited financial statements included in the 1996 annual report comprise the two years ended December 31, 1996 and 1995, the six months ended December 31, l994 and the year ended June 30, l994. Management believes that a comparison of the consolidated statements of operations for the twelve month period ended December 31, 1995 and the six month period ended December l994 is not meaningful because of the length of the reporting periods. Accordingly condensed consolidated statements of operations for the three years ended December 31, 1996, l995 and l994 are presented below for comparative purposes (in thousands except per share data). The condensed statement of operations for the twelve months ended December 31, l994 presented below has been derived from the unaudited financial records of the Company. This condensed consolidated statement of operations reflects all adjustments, consisting only of normal recurring items, which in the opinion of management are necessary to fairly state the Company's results of operations for the period presented. Consolidated statements of operations data:
Twelve Months Ended December 3l, 1996 1995 l994 (unaudited) - ----------------------------------------------------------------------- Sales $ 16,303 $ 18,352 $ l9,938 -------- -------- -------- Cost of Sales 10,819 11,322 11,932 Engineering and Product Development 1,817 1,674 2,157 Marketing and Selling 3,715 3,928 3,695 Administration 3,115 2,211 2,328 Severance & Related Settlement Costs 1,567 Other (Income) Expense - Net (48) 35 29 -------- -------- -------- 20,985 19,170 20,141 -------- -------- -------- Loss before Income Tax Benefit (4,682) (818) (203) Income Tax Benefit (85) (151) -- -------- -------- -------- Net Loss $ (4,597) $ (667) $ (203) ========= ======== ======== Net Loss per Share $ (1.65) $ (.25) $ (.11) ======== ======== ======== Weighted Average Number of Shares Outstanding 2,783 2,678 1,910 ======== ======== ========
27 28 Overview The company incurred a net loss of $4,597,000 in 1996 versus a net loss of $667,000 in 1995 and a net loss of $203,000 in 1994. Net sales declined by 11% in 1996 from those in 1995, and 1995 sales were 8% lower than those in 1994. The loss in 1996 included significant fourth quarter charges totaling $3,048,000 as described below. Significant Fourth Quarter 1996 Adjustments In the fourth quarter of 1996, the Company incurred severance and related settlement costs totaling $1,567,000 related to the resignation of its Chairman and settlement with its principal shareholder in anticipation of the merger with XIT (see Note 2 to the Consolidated Financial Statements). The Company also reduced the carrying value of certain inventory and capitalized software development costs by $376,000 and $630,000, respectively, to their net realizable value. These write-downs charged to cost of sales resulted from the Company's reassessment of the anticipated continuing near-term impact of industry and economic factors which affected the Company's 1996 operations. CXR Telcom's sales have been negatively impacted by delays in buying by its principal customers, as a result of the consolidation and/or restructuring of these companies in the wake of the passage of the Telecommunications Bill of 1996; and CXR SA's sales have been impacted by a decline in sales to France Telecom during its pre-privatization reorganization and a generally weak French economy. Additionally, sales for both operating subsidiaries have been negatively impacted by the rapid obsolescence of the analog-based components of their product lines, particularly older transmission products; and further, both sales and margins have been impacted by extreme price competition for transmission products in general. Although the Company believes based on its current assessment that the write-downs are adequate, no assurance can be given should actual business conditions deteriorate. Additionally, the Company recorded estimated litigation settlement costs totaling $475,000, comprised of expected incremental costs of $344,000 to settle a dispute regarding a former officer's deferred compensation agreement and $131,000 for a contingent payment related to a price guarantee in a stock based settlement of another dispute reached in the fourth quarter of 1996. These estimated costs are included in administrative expenses in the accompanying Consolidated Financial Statements. Sales Consolidated sales for the three years ended December 31, 1996, l995 and 1994 were comprised of the following for the Company's U.S. operating subsidiary, CXR Telcom, and its French operating subsidiary, CXR S.A.(in thousands):
1996 l995 1994 ------- ------- ------- CXR Telcom $ 6,825 $ 8,255 $ 8,045 CXR S.A 9,478 10,097 10,565 Operation Sold 6/30/94 -- -- 1,328 ------- ------- ------- $16,303 $18,352 $19,938 ======= ======= =======
28 29 Sales of $l9,938,000 during the twelve months ended December 31, l994 include $1,328,000 in sales of NAMS and LAN products. These product lines were sold to Numerex (see Note 3 to the Consolidated Financial Statements) at the end of fiscal l994. Consolidated sales for 1996 declined by $2,049,000 or 11% from those in 1995, comprised of declines for CXR Telcom and CXR S.A. of $1,430,000 or 17% and $619,000 or 6%, respectively. These overall declines were caused by the factors discussed above under Significant Fourth Quarter 1996 Adjustments. Lower transmission product sales accounted for all of CXR Telcom's decline, while a decline in transmission product sales of $2,658,000 for CXR S.A. was substantially mitigated by increased revenues from its new network systems business unit. Although consolidated sales in l995 were approximately the same as l994, given the effect of the sale of product lines discussed above, revenues were affected by several factors. Firstly, although CXR Telcom sales were up modestly by 3%, the U.S. Government shutdown caused the delay of processing of several major orders of communications test equipment from several Government agencies. Secondly, sales for CXR S.A. were down by 4% due to a slowdown in business activity which occurred in France as a result of the national strikes and the work stoppages against the French government's services which took place in the latter part of l995. Thirdly, a general decline in demand for analog hand-held test equipment and increased competition in the modem market in Europe further pressured CXR S.A. revenues. Gross Profit Consolidated gross profit and its percentage of sales for the three years ended December 31, 1996, 1995 and 1994 was $5,484,000 or 34%, $7,030,000 or 38%, and $8,006,000 or 40%, respectively. Gross profit for 1996 was impacted by the write-downs described above under Significant Fourth Quarter 1996 Adjustments. Excluding the effects of the write-downs totaling $1,006,000, the gross profit percentage for 1996 would have been 40%. The improvement of this adjusted margin percentage over that of 1995 was due to improved margins on upgraded test instrument product offerings by CXR Telcom more than compensating for the decline in margins on transmission product sales and the relatively lower margins achieved on CXR S.A.'s new network systems sales than those historically achieved from transmission product sales that they have replaced. The decline in gross profit percentage in 1995 from that of 1994 was due to lower margins achieved on aging versions of test instruments sold during the year prior to new test instrument product introductions in the fourth quarter of 1995. Expenses Engineering and product development costs for the three years ended December 31, 1996, 1995 and 1994 presented are as follows (in thousands):
Period Total Cost Capitalized Software Net Expense - ------ ---------- -------------------- ----------- 1996 $2,612 $795 $1,817 1995 2,373 699 1,674 1994 2,647 490 2,157
29 30 Engineering and product development costs relate to both the development and maintenance of the Company's product lines. Current development efforts are directed primarily toward enhancements to the current test instrument product line and development of increased bandwidth (faster speed) transmission products. The level of engineering and product development expenditures has remained relatively constant over the three year period ended December 31, 1996, with the capitalization of software development costs varying by year depending on the mix of product development versus product maintenance efforts. Marketing and selling costs in relation to sales increased to 23% in 1996 from 21% in 1995 and from 19% in 1994. The increase in 1996 over 1995 is due principally to the decline in sales levels, with approximately the same level of fixed departmental expenses. The increase in 1995 over 1994 is due to planned marketing initiatives by CXR S.A. Administrative expenses increased by $904,000 in 1996 over 1995. In addition to the estimated litigation settlement costs of $475,000 discussed above under Significant Fourth Quarter 1996 Adjustments, 1996 costs reflect increased legal fees related to litigations and general corporate matters, increased business development efforts, and increased personnel costs. Administrative expenses were comparable between 1995 and 1994. Other Income and Expense Other (income) expense is comprised of the following for the three years ended December 31, 1996, 1995 and 1994:
1996 1995 1994 ----- ----- ----- Interest income $(371) $(117) Interest expense 319 164 $ 239 Other 4 (12) (210) ----- ----- ----- $ (48) $ 35 $ 29 ===== ===== =====
Interest income in 1996 and 1995 was comprised principally of interest and/or extension fees of $350,000 and $107,000, respectively, on the promissory note taken in payment of the stock subscription from Elk International Corporation Ltd. (see Note 2 to the Consolidated Financial Statements). Interest expense is comprised principally of interest related to deferred compensation liabilities and the Company's short-term borrowings. Fluctuations between the periods is related primarily to the level of borrowings during the respective periods. Other income was $210,000 in 1994 versus nominal amounts in 1996 and 1995 due principally to foreign currency exchange gains and a gain on termination of a facility lease in that year. Income Taxes The income tax benefits for 1996 and 1995 are due to recovery of prior year taxes in France resulting from research tax credits. The Company has gross deferred tax assets of $9,841,000, $8,017,000 and $7,890,000 at December 31, 1996, 1995 and 1994 respectively. The most substantial portion of the gross deferred tax assets represent the future benefits of net operating loss carryforwards which expire 30 31 as detailed in Note 7 to the Consolidated Financial Statements. A valuation allowance has been provided to reduce recorded total possible future tax benefits to zero as the Company's recent history of operating losses does not support a judgment that the deferred tax assets are more likely than not to be realized in the future. Consequently, no tax benefits were recognized for the Company's domestic and foreign operating losses during the periods presented. Tax benefits will be recognized the earlier of when realized in future periods or when future profitability of the Company appears sufficiently probable that it appears more likely than not that the benefits will be realized. Further, the gross deferred tax assets will decline significantly in 1997 as a result of restrictions on the use of the Company's net operating loss carryforwards arising from the ownership change for tax purposes accompanying the merger with XIT. Effects of Inflation The impact of inflation and changing prices on Company's financial condition and results of operations has not been significant. LIQUIDITY AND CAPITAL RESOURCES Cash used in operations for 1996 was $201,000 compared to cash provided by operations of $145,000 for 1995, $820,000 cash used in operations for the six months ended December 31, l994, and cash provided by operations of $166,000 for the year ended June 30, l994. Fluctuations between periods relate principally to changes in working capital elements arising from business levels immediately preceding the respective period ends. The Company had $519,000, $540,000, $216,000, and $669,000 in depreciation and amortization expense which did not require cash outlay for the years ended December 31, l996 and 1995, for the six months ended December 31, l994, and for the year ended June 30, l994, respectively. In addition, in 1996 the Company incurred non-cash charges totaling $2,760,000 including $2,573,000 related to stock based costs of severance and related settlements and certain asset write-downs as discussed above, as well as certain other stock-based payments of expenses. During the six months ended December 31, l994, the Company received $1,025,000 in cash from Numerex Corp. to satisfy the purchase price for the Digilog assets. The proceeds were applied to reduce accounts payable and purchase a certificate of deposit, which was subsequently used for cash needs in 1995. MicroTel's cash uses during 1996 have been financed through short-term bank borrowings, the proceeds from the exercise of warrants and options on the Company's common stock, and the collection of approximately $380,000 of the stock subscription by Elk International Corporation Limited. At December 31, 1996, the Company had no significant commitments for future capital expenditures. Since December 31, 1996, the Company has supplemented cash flows from operations, which continue to be depressed for CXR Telecom in the U.S., with a $500,000 loan from an officer. On February 20, 1997, the Company accepted a commitment from Yorkton Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its best efforts to raise a minimum of $5,000,000 and a maximum of $10,000,000 through a private placement of investment units consisting of one share of restricted common stock and one quarter of a warrant to purchase one 31 32 share of restricted common stock. On April 14, 1997, a first closing occurred on 2,000,000 investment units, for gross proceeds of $5,000,000. Net proceeds to the Company were $4,400,000. The Units were issued primarily to European institutional investors pursuant to the exemption afforded by Regulation S under the Securities Act of 1933, as amended. The offering, which is structured to accommodate multiple closings, would terminate on the earlier of i) the date the maximum offering of $10,000,000 is contracted or ii) April 18, 1997, unless extended by the mutual agreement of the Company and Yorkton. Management believes that cash flows from operations and proceeds from the offering will be adequate to support its working capital and business development needs in 1997. There are two significant legal proceedings pending against the Company (see "Legal Proceedings" and Note 10 to the Consolidated Financial Statements). Management believes that the outcome of these pending litigations will not have a material adverse effect on the Company. Outlook In the U.S. the negative impact of the reorganizations of CXR Telcom's customers in response to the signing of the Telecommunications Bill of 1996 continues, but is believed to be a temporary phenomenon. The industry repositioning is expected to result in growth as the changed entities emerge and the long distance carriers vie for the local loop business of the RBOC's and the RBOC's compete for long distance services. Final implementation guidance on the deregulation provided for in the Telecommunications Bill of 1996 was released in late August 1996 by the federal government. CXR Telcom has been working with its customers to prepare for their future needs in the expansion of their markets. To overcome the negative factors impacting the Company's French operation, CXR S.A. has implemented various changes to its business strategy. It has introduced a new line of ISDN Terminal Adapters to its transmission product line, has begun a new business unit which provides networking solutions to the business user utilizing OEM products, and has refocused its marketing to expand its markets outside of France. Revenue improvements have begun to be realized as a result of these efforts. With respect to XIT's business, beginning in the fourth quarter of its fiscal year ended September 30, 1996, its gross margins began to decline significantly as a result of lower gross margins in its XCEL Arnold Circuits, Inc. subsidiary when Motorola, its largest customer, increased its demand for newer, digital products to replace the higher gross margin analog products previously purchased by Motorola. The Company does not anticipate the gross margins for the Circuits Sector of XIT to improve until the latter part of the second quarter of calendar 1997, when it expects yield improvements, reductions in overtime and outsourcing, improved cost control, and higher pricing for digital products sold to Motorola will begin to show an effect. New Accounting Pronouncements Financial Accounting Standards Board Statement No 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121), became effective for the Company in l996. The new accounting pronouncement requires, among other things, that 32 33 impairment losses on assets to be held, and gains or losses from assets that are expected to be disposed of, be included as a component of income from continuing operations. Addition of FAS 121 in 1996 had no material effect on the consolidated financial statements as the Company's existing accounting policies were consistent with its provisions. Financial Accounting Standards Board Statement No. 123, "Accounting for Stock Based Compensation" (FAS 123), also became effective for the Company in l996. The new accounting pronouncement provides an alternative "fair value" method of accounting for stock options and other stock based compensation and also provides for expanded disclosures. The Company has elected not to apply the alternative accounting method for stock based compensation to employees, but was required to apply the new method to stock based transactions with non-employees and to expand its disclosures in l996 to comply with FAS 123, including providing proforma effects as if it had elected the alternative accounting method for stock based compensation. (See Note 11 to Consolidated Financial Statements for expanded disclosures). On March 3, 1997 the Financial Accounting Standards Board issued FAS No. 128 "Earnings per Share". (FAS 128), which will become effective for the Company for its year end December 31, 1997. This pronouncement provides a different method of calculating earnings per share than is currently used in accordance with APB No. 15, "Earnings per Share". FAS No. 128 provides for the calculation of Basic and Diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share of APB No. 15. Potentially dilutive securities have an antidilutive effect in loss periods and are excluded from FAS 128 computations similar to current practice. Therefore, the required restatements of prior period information upon adoption will have no effect on earnings per share presented in the accompanying Consolidated Financial Statements. However, as discussed previously, comparative historical financial information of the Company presented after the reverse acquisition by XIT Corporation on March 26, 1997 will be those of XIT Corporation, and the effects of FAS 128 on such financial statements have yet to be determined. 33 34 Item 8. Financial Statements and Supplementary Data This information appears in a separate section of this Report following Part IV. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. None. PART III Items 10-13. The information required by items 10-13 will either be set forth in the definitive proxy statement in respect of the 1997 Annual Meeting of Stockholders of the Company to be filed within 120 days of December 31, 1996, pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the 1997 Proxy Statement), which is incorporated herein by reference, or the required information will be included as an amendment to this form 10-K Annual Report on or before April 30, 1997. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) and (2) Reference is made to the "Index to Consolidated Financial Statements and Financial Statement Schedules" appearing in a separate section of this Report following this Part IV. (a)(3) Exhibits. See attached Exhibit Index. (b) None. (c) The exhibits required by this portion of Item 14 are submitted as a separate section of this report. (d) None. 34 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: 4/15/97 MicroTel International, Inc. (Registrant) By: /s/ Carmine T. Oliva ---------------------------------------- Carmine T. Oliva Chief Executive Officer 35 36 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date - --------- -------- ---- /s/ Carmine T. Oliva Chairman of the Board 4/15/97 - --------------------------- of Directors Carmine T. Oliva /s/ David A. Barrett Director 4/15/97 - --------------------------- David A. Barrett /s/ Robert B. Runyon Director 4/15/97 - --------------------------- Robert A. Runyon /s/ Barry E. Reifler Chief Financial Officer - --------------------------- (Principal Accounting and Barry E. Reifler Financial Officer) 4/15/97 /s/ Laurence P. Finnegan, Jr. Director 4/15/97 - --------------------------- Laurence P. Finnegan, Jr.
36 37 Index to Exhibits 2. Merger Agreement dated December 31, 1996 between XIT Corporation, XIT Acquisition, Inc. and MicroTel International, Inc.(1) 3.1 Certificate of Incorporation of MicroTel International, Inc. as amended to date.(2) 3.2 Bylaws of MicroTel International, Inc.(3) 3.3 Certificate of Amendment of Certificate of Incorporation of MicroTel International, Inc.# 10.1 Lease for 2040 Fortune Dr., San Jose, CA 95131.(4) 10.2 1986 Incentive Stock Option Plan.(5) 10.3 Form of Officers Deferred Compensation Agreement by and between Raymond E. Jacobson and CXR Corporation.(6) 10.4 Agreement from San Jose National Bank for CXR Telcom Corporation dated May 19, 1995.(7) 10.5 Qualified Employee Stock Purchase Plan.(8) 10.6 1993 Incentive Stock Option Plan.(9) 10.7 Stock Purchase Agreement with DDC.(10) 10.8 First Amendment to Stock Purchase Agreement with DDC.(11) 10.9 Second Amendment to Stock Purchase Agreement with DDC.(12) 10.10 Warrant to Purchase Common Stock of MicroTel International, Inc. Issued to DDC.(13) 10.11 Form of Warrant to Purchase Common Stock of MicroTel International, Inc. issued to Yorkton Securities, Inc.# 10.12 Form of Warrant to Purchase Common Stock of MicroTel International, Inc. issued to entrenet Group, L.L.C.# 10.13 Form of Warrant to Purchase Common Stock of MicroTel International, Inc. issued to various subscribers.#
37 38 10.14 Agreement between MicroTel International, Inc. and Elk International Corporation, Ltd. dated November 15, 1996 (without Exhibits).* 10.15 Settlement Agreement between MicroTel International, Inc. and Daniel Dror dated December 3, 1996 (without Exhibits).* 10.16 Agency Agreement between MicroTel International, Inc. and Yorkton Securities, Inc.# 10.17 Form of Subscription Agreement between MicroTel International, Inc. and various subscribers.# 10.18 Employment Arrangement between Henry Mourad and Registrant. (without Exhibits)# 10.19 Employment Arrangement between Barry Reifler and Registrant. (without Exhibits)# 10.20 Employment Agreement between Registrant and Jacques Moisset dated July 1, 1995.* 10.21 Employment Agreement dated January 1, 1996 between XIT and Carmine T. Oliva.* 10.22 XIT Corporation Note and Credit Agreement re: Imperial Bank Revolver Loan #0070000702700003.* 10.23 XIT Corporation Note and Credit Agreement re: Imperial Bank Term Loan #0070000702700004.* 10.24 XCEL Arnold Circuits, Inc. Note and Credit Agreement re: Imperial Bank Revolver Loan #0070000702600003.* 10.25 XCEL Arnold Circuits, Inc. Note and Credit Agreement re: Imperial Bank Term Loan #0070000702600004.* 10.26 XCEL Arnold Circuits, Inc. Note and Credit Agreement re: Imperial Bank Term Loan #0070000702600005.* 10.27 Lease Agreement between XIT Corporation and P&S Development.* 10.28 Lease Agreement between XIT Corporation and Don Mosco.* 10.29 General Partnership Agreement between XIT Corporation and P&S Development.* 10.30 Lease Agreement between XIT Arnold Circuits, Inc. and Frances I. Peters.*
38 39 10.31 Lease Agreement between XCEL Arnold Circuits, Inc. and Don Wilson and Zenna N. Wilson.* 10.32 Lease Agreement between XCEL Arnold Circuits, Inc. and Ellis Wesson.* 10.33 Lease Agreement between XCEL Arnold Circuits, Inc. and Roland E. Hay and Doris L. Hay.* 10.34 Lease Agreement between XCEL Arnold Circuits, Inc. and RKR Associates.* 10.35 Option Agreement between MicroTel International, Inc. and Elk International Corporation dated November 15, 1996.* 10.36 Amendment to Option Agreement between MicroTel International, Inc. and Daniel Drorr dated November 15, 1996.* 10.37 Option Agreement between MicroTel International, Inc. and Elk International Corporation dated December 3, 1996.* 10.38 Warrant to Purchase Common Stock of MicroTel International, Inc. issued to Elk International Corporation.* 10.39 Agreement of Settlement and Mutual Release between MicroTel International, Inc. and Francis John Gorry dated June 28, 1996.* 10.40 Amended Agreement of Settlement and Mutual Release between MicroTel International, Inc. and Francis John Gorry dated November 30, 1996.* 10.41 Promissory Note between MicroTel International, Inc. and Jack Talan dated February, 1997.* 21.1 List of Subsidiaries of MicroTel International, Inc.# 23.1 Consent of BDO Seidman, LLP.# 23.2 Consent of Deloitte & Touche LLP.# 27. Financial Data Schedule.# 99.1 Undertakings to be Incorporated by Reference to Forms S-8 33-27454 and 33-77926.(14) 99.2 Undertakings to be Incorporated by Reference to Form S-8 333-12567.
- --------------------- # Filed herewith. * To be filed by amendment. (1) Incorporated by reference to MicroTel International, Inc. report on Form 8K filed as Exhibit 1 to Item 2 of the Report on January 21, 1997 (File No. 1-10346). (2) Incorporated by reference to MicroTel International, Inc. annual report on Form 10-K for the year ended December 31, 1995 (File No. 1-10346). (3) Incorporated by reference to CXR Corporation Registration Statement on Form S-4 No. 33-30818. 39 40 (4) Incorporated by reference to CXR Corporation annual report on Form 10-K for the year ended June 30, 1994 (File No. 1-10346). (5) Incorporated by reference to CXR Corporation Registration Statement on Form S-4 No. 33-30818. (6) Incorporated by reference to CXR Telecom Corporation annual report on Form 10-K for the year ended June 30, 1993 (File No. 1- 10346). (7) Incorporated by reference to MicroTel International, Inc. annual report on Form 10-K for the year ended December 31, 1995 (File No. 1-10346). (8) Incorporated by reference to CXR Corporation Registration Statement on Form S-4 No. 33-30818. (9) Incorporated by reference to CXR Corporation Registration Statement on Form S-8 No. 33-77926. (10) Incorporated by reference to CXR Corporation annual report on Form 10-K for the year ended June 30, 1994 (File No. 1-10346). (11) Incorporated by reference to CXR Corporation annual report on Form 10-K for the year ended June 30, 1994 (File No. 1-10346). (12) Incorporated by reference to CXR Corporation annual report on Form 10-K for the year ended June 30, 1994 (File No. 1-10346). (13) Incorporated by reference to CXR Corporation annual report on Form 10-K for the year ended June 30, 1994 (File No. 1-10346). (14) Incorporated by reference to CXR Corporation annual report on Form 10-K for the year ended June 30, 1994 (File No. 1-10346). 40 41 MICROTEL INTERNATIONAL INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page ---- Report of Independent Certified Public Accountants F-2 Independent Auditors' Report F-3 Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 1996 and 1995 F-4 Consolidated Statements of Operations for the Years Ended December 31, 1996 and 1995, the six months ended December 31, 1994 and the year ended June 30, 1994 F-5 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996 and 1995, the six months ended December 31, 1994 and the year ended June 30, 1994 F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and 1995, six months ended December 31, 1994 and the year ended June 30, 1994 F-7 Notes to Consolidated Financial Statements F-8 to F-27 Consolidated Financial Statement Schedules: Schedule II- Valuation and Qualifying Accounts F-28
All other schedules have been omitted since the required information is contained in the Consolidated Financial Statements or because such schedules are not required. F-1 42 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS MicroTel International, Inc. San Jose, California We have audited the accompanying consolidated balance sheets of MicroTel International, Inc. (formerly CXR Corporation) as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1996 and 1995, and the six months ended December 31, 1994. We have also audited the schedule listed on the accompanying Index at Item 8. These financial statements and the schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used as significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MicroTel International, Inc. at December 31, 1996 and 1995, and the results of their operations and their cash flows for the years ended December 31, 1996 and 1995, and the six months ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein. BDO Seidman, LLP San Francisco, California April 14, 1997 F-2 43 INDEPENDENT AUDITORS' REPORT MicroTel International, Inc. We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows of MicroTel International, Inc. (formerly CXR Corporation) and its subsidiaries for the year ended June 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the results of the operations and the cash flows of MicroTel International, Inc. (formerly CXR Corporation) and its subsidiaries for the year ended June 30, 1994 in conformity with generally accepted accounting. The accompanying fiscal 1994 financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the 1994 financial statements included in the June 30, 1994 Annual Report to the Securities and Exchange Commission on Form 10-K, the Company's declining revenues and recurring losses from operations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters were also described in Note 1 to such 1994 financial statements. The fiscal 1994 financial statements do not include any adjustments that might result from the outcome of this uncertainty. Subsequent to June 30, 1994, the Company agreed to amendments to the Common Stock Purchase Agreement (the Agreement) with Daniel Dror & Co. ("DDC") or designee, approved by the stockholders in April 1994. In September 1994, as consideration under the first amendment to the Agreement, the Company was assigned a promissory note and received title to a securities brokerage account consisting of cash and common stock and the Company assumed the liability for certain financial derivative instruments which were secured by the cash and common stock investments in the securities brokerage account. Subsequent to the acceptance of this consideration on behalf of the Company by Daniel Dror in his capacity as Chairman of the Company's investment committee, the Board of Directors reviewed the consideration received and determined that it would be in the best interests of the Company to accept payment with securities which are less likely to experience significant fluctuations in value. On November 8, 1994 the Company executed a second amendment to the Agreement dated October 16, 1994 whereby the transactions under the previous amended Agreement were effectively rescinded, the Company agreed to sell a reduced number of shares to the designee of DDC and the Company agreed to accept, subject to completion of its due diligence on or before December 31, 1994, assignment of a promissory note (payable on December 31, 1995 and secured by common stock of another public company) as consideration under such second amendment to the Agreement. These transactions are described more fully in Note 2 to the financial statements. DELOITTE & TOUCHE LLP San Jose, California August 31, 1994 (November 18, 1994 as to paragraphs two through four in Note 2) F-3 44 MICROTEL INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS December 1996 and December 1995 (in thousands)
Dec. 31, Dec. 31, 1996 1995 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 271 $ 432 Investments in marketable securities 152 Accounts receivable, less allowance for doubtful accounts of $186 and $425, respectively 2,936 3,582 Inventories 3,004 4,148 Other current assets 487 283 -------- -------- Total current assets 6,698 8,597 -------- -------- Plant and equipment-net 526 709 Software development costs-net 1,027 1,209 Foreign tax receivable 830 790 Other assets 238 20 -------- -------- $ 9,319 $ 11,325 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks $ 1,142 $ 759 Current portion long term debt 44 170 Accounts payable 2,580 2,184 Accrued payroll and related expenses 748 922 Other accrued liabilities 749 748 Current portion-deferred compensation 737 161 Deferred income 350 -------- -------- Total current liabilities 6,000 5,294 -------- -------- Long term debt 36 54 Deferred compensation liability 507 803 Other long-term liabilities 218 -------- -------- Total liabilities 6,543 6,369 -------- -------- Commitments and contingencies Stockholders' equity: Common stock 10 45 Additional paid-in capital 23,560 22,293 Accumulated deficit (21,371) (16,774) Stockholder's note receivable (1,337) Deferred compensation (40) (88) Cumulative translation adjustments 617 817 -------- -------- Stockholders' equity 2,776 4,956 -------- -------- $ 9,319 $ 11,325 ======== ========
See notes to consolidated financial statements. F-4 45 MICROTEL INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts)
SIX MONTHS FOR THE FOR THE YEARS ENDED ENDED YEAR ENDED DEC 31, DEC 31, DEC 31, June 30, 1996 1995 1994 1994 -------- -------- -------- -------- Sales $ 16,303 $ 18,352 $ 9,931 $ 21,648 -------- -------- -------- -------- Costs and expenses: Cost of sales 10,819 11,322 6,174 12,647 Engineering and product development 1,817 1,674 659 2,960 Marketing and selling 3,715 3,928 1,654 3,975 Administration 3,115 2,211 1,049 2,571 Severance and related settlement costs 1,567 -------- -------- -------- -------- 21,033 19,135 9,536 22,153 -------- -------- -------- -------- Income (loss) from operations (4,730) (783) 395 (505) Other income (expense): Interest income 371 117 9 9 Interest expense (319) (164) (121) (258) Other (4) 12 15 115 -------- -------- -------- -------- Income (loss) before income tax benefit (4,682) (818) 298 (639) Income tax benefit (85) (151) -------- -------- -------- -------- Net income (loss) ($4,597) ($667) $ 298 ($639) ======== ======== ======== ======== Net income (loss) per share ($1.65) ($0.25) $ 0.15 ($0.39) ======== ======== ======== ======== Weighted average number of shares used in calculating net income (loss) per share 2,783 2,678 1,998 1,636 ======== ======== ======== ========
See notes to consolidated financial statements. F-5 46 MICROTEL INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
(A) Common Stock Additional Stockholder's Cumulative Total Paid-in Accumulated Note Deferred Translation Stockholders' Shares Amount Capital Deficit Receivable Compensation Adjustments Equity ------ ------ ------- ------- ---------- ------------ ----------- ------ BALANCE JUNE 30, 1993 7,730 26 19,824 (15,766) 257 4,341 Issuance of common stock for cash net of issuance cost of $94 thousand 1,965 6 710 716 Translation adjustments 196 196 Net loss (639) (639) ------ -- ------ ------- ------- ------- ---- ------ BALANCE JUNE 30, 1994 9,695 32 20,534 (16,405) 453 4,614 Issuance of common stock for cash 1 Issuance of common stock for notes receivable 3,343 11 1,326 (1,337) Translation adjustments 66 66 Net income 298 298 ------ -- ------ ------- ------- ------- ---- ------ BALANCE DECEMBER 31, 1994 13,039 43 21,860 (16,107) (1,337) 519 4,978 Issuance of common stock for cash net of issuance cost of $15 thousand 368 1 220 221 Issuance of common stock in settlement of debt 130 1 79 80 Issuance of incentive stock awards 215 134 (134) Amortization 46 46 Translation adjustments 298 298 Net loss (667) (667) ------ -- ------ ------- ------- ------- ---- ------ BALANCE DECEMBER 31, 1995 13,752 45 22,293 (16,774) (1,337) (88) 817 4,956 Issuance of common stock for cash 214 1 128 129 Issuance of common stock in payment of expenses 80 69 69 Issuance of compensation awards 90 1 57 (31) 27 Five for one reverse split net of costs of $43 thousand (11,309) (37) (6) (43) Payments on shareholders' note receivable 380 380 Recission of remaining stock subscription (478) (2) (955) 957 Issuance of common stock for cash 21 46 46 Issuance of common stock in payment of expenses 59 182 182 Employee and officer awards and option exercises, including $1.45 million in non-cash compensation 511 2 1,746 1,748 Amortization 79 79 Translation adjustments (200) (200) Net loss (4,597) (4,597) ----- --- ------- -------- -- ---- ---- ------ BALANCE DECEMBER 31, 1996 2,940 $10 $23,560 ($21,371) $0 ($40) $617 $2,776 ===== === ======= ======== == ==== ==== ======
(A) $.0033 par value; 25,000 shares authorized (B) $.01 par value; 10,000 preferred shares authorized none issued See notes to consolidated financial statements. F-6 47 MICROTEL INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
FOR THE FOR THE SIX MONTHS SIX MONTHS FOR THE YEARS ENDED ENDED ENDED Dec. 31, Dec. 31, Dec. 31, June 30, 1996 1996 1994 1994 ------- ------- ------- ------- Cash flows from operating activities: Net income (loss) ($4,597) ($ 667) $ 298 ($ 639) Reconciliation to net cash provided by (used in) operations: Depreciation 221 274 153 387 Amortization of intangible assets 298 266 63 282 Deferred compensation 358 46 Stock-based compensation and expense 1,754 Write-down of assets 1,006 Changes in assets and liabilities net of sale of NAMS and LAN product lines: Investments in marketable securities (152) Accounts receivable 646 1,316 (1,084) (1,061) Inventories 768 (412) 463 766 Other current assets (52) 4 31 97 Other non-current assets (218) Accounts payable 396 (361) (701) 1,097 Other current liabilities (523) (262) (74) (252) Foreign taxes receivable (40) (144) 2 Other noncurrent liabilities (218) 237 31 (513) ------- ------- ------- ------- Net cash provided by (used in) operations (201) 145 (820) 166 ------- ------- ------- ------- Cash flows from investing activities: Certificate of deposit 650 (650) Additions to plant and equipment (71) (148) (43) (171) Capitalized software (795) (879) (490) Collection of other receivables 1,025 ------- ------- ------- ------- Net cash used in investing activities (866) (377) (158) (171) ------- ------- ------- ------- Cash flows from financing activities: Notes payable-net 383 (184) 943 (737) Term debt Additions 91 Repayments (135) (95) (63) (174) Fee for note receivable extension 250 Proceeds from common stock transactions 827 221 716 Costs relating to stock split (43) ------- ------- ------- ------- Net cash provided by (used in) financing activities 1,032 192 880 (104) ------- ------- ------- ------- Effect of exchange rate changes on cash (126) 175 49 114 ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents (161) 135 (49) 5 Cash and cash equivalents at beginning of period 432 297 346 341 ------- ------- ------- ------- Cash and cash equivalents at end of period $ 271 $ 432 $ 297 $ 346 ======= ======= ======= ======= Non cash Investing and financing activities: Issuance of equity securities for compensation and expenses $ 1,754 ======= Cancellation of stock subscription $ 957 ======= Issuance of common stock for debt settlement $ 80 ======= Sale of common stock for note receivable $ 1,337 ======= Sale of NAMS and LAN product lines for a note receivable $ 1,025 =======
See notes to consolidated financial statements. F-7 48 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS MicroTel International, Inc. (the Company) is a holding company for its wholly-owned subsidiaries CXR Telcom Corporation, a U.S. corporation, and CXR S.A., its French subsidiary. The company designs, manufactures and markets electronic telecommunication test equipment and data communications equipment at its facilities in San Jose, California and in Abondant, France. BASIS OF PRESENTATION Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, CXR Telcom Corporation and CXR S.A. Intercompany balances and transactions are eliminated in consolidation. The French Franc is considered to be the functional currency of the French subsidiary. Foreign exchange transaction gains and (losses) were as follows: Year ended December 31, 1996 $(4,000) Year ended December 31, 1995 16,000 Six months ended Dec. 31, l994 423,000 Year ended June 30, 1994 75,000 Fiscal Year end Change Effective December 31, 1994, the Company changed its fiscal year end from June 30 to December 31 to better align its financial reporting cycle with the business cycle of its products. Accordingly, the audited financial statements included in the annual report comprise the years ended December 31,1996 and 1995, the six months ended December 31, l994 and the year ended June 30, l994 The condensed statement of operations for the twelve months ended December 31, l994 presented below for comparative purposes has been derived from the unaudited financial records of the Company. This condensed consolidated statement of operations reflects all adjustments, consisting only of normal recurring items, which in the opinion of management are necessary to fairly state the Company's results of operations for the period presented. F-8 49 Consolidated statements of Operations data for the twelve months ended December 31, 1994 (unaudited):
(in thousands except for per share data) Sales $ 19,938 -------- Cost of Sales 11,932 Engineering and Product Development 2,157 Marketing and Selling 3,695 Administration 2,328 Other Expense - Net 29 -------- 20,141 -------- Net Loss $ (203) ======== Net Loss per Share $ (.11) ======== Weighted Average Number of Shares Outstanding 1,910 ========
New Accounting Pronouncements Financial Accounting Standards Board Statement No 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121), became effective for the Company in l996. The new accounting pronouncement requires, among other things, that impairment losses on assets to be held, and gains or losses from assets that are expected to be disposed of, be included as a component of income from continuing operations. Adoption of FAS 121 in 1996 had no material effect on the consolidated financial statements as the Company's existing accounting policies were consistent with its provisions. Financial Accounting Standards Board Statement No. 123, "Accounting for Stock Based Compensation" (FAS 123), also became effective for the Company in l996. The new accounting pronouncement provides an alternative "fair value" method of accounting for stock options and other stock based compensation and also provides for expanded disclosures. The Company has elected not to apply the alternative accounting method for stock based compensation to employees, but was required to apply the new method to stock based transactions with non-employees and to expand its disclosures in l996 to comply with FAS 123, including providing proforma effects as if it had elected the alternative accounting method for stock based compensation. (See Note 11 to Consolidated Financial Statements for expanded disclosures). On March 3, 1997 the Financial Accounting Standards Board issued FAS No. 128 "Earnings per Share". (FAS 128), which will become effective for the Company for its year end December 31, 1997. This pronouncement provides a different method of calculating earnings per share than is currently used in accordance with APB No. 15 "Earnings per Share". FAS No. 128 provides for the calculation of Basic and Diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share of APB No. 15. Potentially dilutive securities have F-9 50 an antidilutive effect in loss periods and are excluded from FAS 128 computations similar to current practice. Therefore, the required restatements of prior period information upon adoption will have no effect on earnings per share presented in the accompanying Consolidated Financial Statements. However, as discussed in Note 13, comparative historical financial information of the Company presented after the reverse acquisition by XIT Corporation on March 26, 1997 will be those of XIT Corporation, and the effects of FAS 128 on such financial statements have yet to be determined. Reverse Stock Split On August 15, 1996 the shareholders of the Company ratified a one-for-five reverse stock split effective for holders of record on August 29, 1996. Share and per share amounts in the Consolidated Financial Statements and Notes thereto have been restated to give effect to the reverse split. Reclassifications Certain 1995 amounts have been reclassified to conform to the 1996 presentation with no impact on the net loss for that year. CASH EQUIVALENTS All highly liquid instruments purchased with an initial maturity of three months or less are considered cash equivalents. INVESTMENTS The Company classifies its investments in common stock of publicly-traded companies as trading securities and records the investments at market. Realized or unrealized gains and losses are included in the statement of operations and were minimal for all periods presented. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out cost) or market. PLANT AND EQUIPMENT Plant and equipment are stated at cost. Depreciation and amortization are computed principally on the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes over the estimated useful lives of the assets as follows: Building 20 years Machinery, Equipment, Furniture and Fixtures 3-5 years Leasehold Improvements Lesser of lease term or estimated useful life F-10 51 SOFTWARE DEVELOPMENT COSTS Software development costs, which include purchased technology, are capitalized beginning when technological feasibility has been established or when purchased from third parties and continuing through the date of commercial release. Amortization commences upon commercial release of the product and is calculated using the greater of the straight line method over three years or the ratio of the products' current revenues divided by the anticipated total product revenues. During the year ended December 31, 1996, $795,000 of developed software was capitalized, $298,000 was amortized and charged to cost of goods sold, and the carrying value of certain capitalized software was reduced by $630,000 to reflect revisions in estimated future net realizable value (See Note 12). During the year ended December 31, l995, $699,000 of developed software was capitalized, $180,000 of software was purchased, and $188,000 of amortization was charged to cost of goods sold. During the six months ended December 31, 1994, $490,000 of developed software was capitalized and no amortization was recognized. At June 30, l994 all prior capitalized software costs were fully amortized and written off. Writedowns of carrying value are charged to cost of goods sold. GOODWILL Goodwill is amortized on a straight-line basis over its estimated useful life. In 1993, the Company adjusted the expected life of the goodwill related to its acquired LEA product line from ten years to five years to reflect the decline in demand for analog instruments. The remaining goodwill was fully amortized in l995. Related goodwill amortization for the year ended December 31, 1995, the six months ended December 31, 1994 and the year ended June 30, 1994 was $78,000, $63,000 and $124,000, respectively. REVENUE RECOGNITION The Company recognizes product revenues and related estimated warranty costs upon shipment. License, maintenance and lease revenues are recognized when earned. INCOME TAXES Deferred income taxes result from temporary differences between the financial statement and income tax basis of assets and liabilities (See Note 7). The Company adjusts the deferred tax asset valuation allowance based on judgments as to future realization of the deferred benefits supported by demonstrated trends in the Company's operating results. NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Common stock equivalents were antidilutive and therefore not part of the shares used in calculating net loss per share in l996 and l995 and fiscal l994. Common stock equivalent shares (shares covered by the stock option and warrant plans) were 295,000 for the six months ended December 3l, l994 and were considered as outstanding for net income per share computations. F-11 52 MAJOR CUSTOMERS No one customer accounted for 10% or more of sales during 1996 or l995. One customer accounted for l0% and 11% of sales during the six months ended December 3l, l994 and for the fiscal year l994, respectively. SUPPLEMENTAL CASH FLOW INFORMATION The Company paid interest of approximately $261,000 in 1996, $164,000 in 1995, $121,000 in the six months ended December 31, l994, and $258,000 in the fiscal year ended June 30, l994. The Company paid income taxes of $9,000 in 1996, $2,000 in l995, $7,000 in the six months ended December 31, l994, and $28,000, in the fiscal year ended June 30, l994. MANAGEMENT ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK The Company extends unsecured credit to its customers primarily in the telecommunications industry in the United States and Europe. Despite the industry concentration, the Company believes credit risk is mitigated by the large number of customers with which it does business and because these customers are typically large well-established companies. 2. RELATED PARTY TRANSACTIONS Daniel Dror was the Company's Chairman and Chief Executive Officer from 1994 until his resignation on November 15, 1996. Elkana Faiwuszeiwicz, the President and control person of Elk International Corporation Ltd. ("Elk"), is the brother of Mr. Dror. Based upon information contained in Elk's Schedule 13D filed with the Securities and Exchange Commission dated January 25, 1994, Mr. Dror may be deemed a "control" person of Elk and Mr. Dror, Daniel Dror & Company, Inc. ("DDC") and Elk may be deemed to constitute a "group" as those terms are defined under the Securities Act of 1933, as amended, and Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. Mr. Dror and DDC each disclaim any beneficial ownership in Elk and in stock of the Company owned by Elk. Pursuant to an agreement dated January 5, l994, the Company issued 300,000 shares of the Company's common stock to the designees of DDC for $600,000 (or $2.00 per share) including 210,000 shares to Elk. Additionally, pursuant to the agreement, the Company issued to Elk warrants to purchase 100,000 shares for $2.50 per share, exercisable at any time prior to December 25, l995. The Company also entered into a common stock purchase agreement with DDC on March l0, l994 whereby DDC, or its designee, was to acquire 1,260,000 shares of the F-12 53 Company's common stock for an aggregate of $2,520,000 (or $2.00 per share), payable in cash, or at the option of the Company, in cash, cash equivalents, or marketable securities or any combination thereof. The stockholders of the Company approved the common stock purchase agreement (the Agreement) on April 16, l994. The Agreement provided for a closing by June 30, l994 contingent upon all conditions to closing being fulfilled. As permitted under the terms of the Agreement, the Board of Directors on July 27, l994 amended the Agreement, following claims by DDC and its designee raised prior to June 30, l994 that certain closing conditions had not been satisfied. The amended Agreement required the Company to issue and sell 911,484 shares to Elk as designee of DDC, for an aggregate purchase price of $1l,882,967 (based on the previously agreed price of $2.00 per share), in cash, cash equivalents or marketable securities. In September l994, Elk tendered the assignment of an interest-free promissory note in the amount of $805,555 secured by shares of another public company and transferred a brokerage account to the Company consisting of cash and common stock of $1,077,412 amounting to an aggregate of $l,882,967 (the Company assumed the liability for certain financial instruments amounting to $506,250 which were secured by the cash and common stock investments in the brokerage account). Subsequent to this transfer, a loan of $226,000 was made from the brokerage account to another entity controlled by DDC which loan was payable with 15% interest on December 31, l995. Although no formal agreements were signed, DDC indicated its intent to reimburse the Company for any loss resulting from the settlement of the financial instruments and indebtedness from the related party. The acceptance of the consideration received and subsequent loan were authorized by Daniel Dror in his capacity as Chairman of the Company's investment committee prior to formal review by the Board of Directors. The Board of Directors subsequently reviewed the consideration tendered under the amended Agreement and determined that it would be in the best interests of the Company to accept payment from Elk with securities less likely to experience significant fluctuations in value. On November 8, l994 the Company executed a second amendment to the Agreement dated October l6, l994 with DDC whereby the transactions under the previous amendment were effectively rescinded and the Company agreed to issue and sell 668,725 shares to Elk as designees of DDC, for the aggregate purchase price of $1,337,449 (or $2.00 per share) on or before December 3l, l994. In payment of the purchase price under the second amendment to the Agreement, the Company accepted assignment of a promissory note payable to Elk from a limited partnership in the aggregate amount of $1,444,444 payable on December 3l, l995. The face amount of the promissory note includes the purchase price of $1,337,449 plus $106,995, representing interest on the purchase price at an interest rate of 8% per annum for the period commencing on December 3l, l994 through December 3l, l995. At a board meeting held in December 1995 the Company agreed to accept $250,000 to extend the note to December 15, 1996 and $100,000 as prepaid interest for the extension period. The $350,000 was recognized as income in l996 over the extension period of the note. As a result of this agreement the Board extended the option period of the remaining 90,000 Elk warrants for two years. Payment of the promissory note was secured by escrowed shares of another public company and the shares issued to Elk were being held in escrow and were to be delivered to Elk when the promissory note had been fully satisfied. F-13 54 In June 1996, Elk was given the right to make alternative cash payment to the Company for the stock subscription through December 15, 1996 releasing shares from escrow at the price of $2.00 per share, and to receive a corresponding assignment of proceeds from the promissory note when collected. Elk made payments against the stock subscription aggregating $380,000 through November 14, 1996, releasing 190,000 shares of common stock from the escrow. On November 15, 1996, the Company and Elk entered into an agreement pursuant to which Elk received (i) an option exercisable for a period of three years to purchase 500,000 shares of Common Stock at an exercise price of $2.375 per share, (ii) the extension of an outstanding warrant to purchase 90,000 shares of Common Stock for three years, and (iii) the return to Elk of the $1,444,444 promissory note. In exchange for the foregoing, the remaining shares held in escrow by the Company and the subscription right were canceled. The costs of this settlement totaling $807,000, including the valuation of the option grant of $700,000, was recorded in the fourth quarter of 1996. Also on November 15, 1996 Mr. Dror resigned as Chairman and Chief Executive Officer of the Company in anticipation of the pending merger with XIT. Mr. Jack Talan, a director of the Company, was appointed interim Chairman and Chief Executive Officer until consummation of the transaction. Upon his resignation, Mr. Dror (or his designee) received as a severance award for past service: (a) 350,000 shares of the Company's common stock; (b) an extension of the exercise period to November 14, 1999 on options he currently holds to purchase 25,000 shares of the Company's common stock; and (c) options to purchase 250,000 shares of the Company's common stock at a price of $2.375 per share. The latter options are excercisable for a period of 5 years, but only after Mr. Dror repays a certain indebtedness to the Company of approximately $211,000, which amount is due in 5 annual installments and which may be repaid by surrendering the options for value equivalent to the lesser of the future appreciation of the Company's common stock over the exercise price or $.50 per option. On December 3, 1996, it was mutually agreed between the Company and Mr. Dror to substitute an option to acquire 300,000 shares of common stock at an exercise price of $.01 per share for 300,000 shares of the previous award and on December 23, 1996, these options were exercised. The compensation expense associated with this grant of $560,000, as well as the value of the 50,000 shares awarded of $119,000 and other costs totaling $82,000 related to the immediate vesting of previous stock based deferred compensation to Mr. Dror and the settlement of certain amounts due the Company by Mr. Dror, were recognized in the fourth quarter of 1996. Additionally, during 1996 and 1995, the Company granted 18,000 and 43,000 shares, respectively, as incentive stock awards principally to certain directors and officers, which vest generally over a three-year period. The total value of these shares based on the market price of the Company's common stock on the date of grant totaled $192,000. Compensation expense recognized by the Company for the awards totaled $106,000 and $46,000 for 1996 and 1995, including amortization of related deferred compensation. In October and November of 1996, the Company granted non-qualified stock options to acquire approximately 156,000 shares of the Company's Common Stock to certain officers at an exercise F-14 55 price equal to 80% of the market value on the date of the grant. Compensation expense associated with these grants approximated $48,000. On February 19, 1997, in recognition of past and future services to the Company, Mr. Talan was granted 150,000 restricted shares of the Company's common stock with a market value as of that date of $337,500 ($2.25 per share). On February 25, 1997 through March 5, 1997, Mr. Talan also loaned the Company an aggregate of $500,000. Such loans bear interest at the rate of 6% per annum and are payable on April 25, 1997. 3. DISPOSITIONS At the end of the fourth quarter of the year ended June 30, l994 the Company sold the net assets of its NAMS and LAN product lines to Numerex for $1,025,000 which is included in other receivables at June 30, l994. The price represented the book value of the net assets sold, and there was no gain or loss on the sale. These products accounted for sales of approximately $4,657,000 in fiscal l994. 4. OPERATIONS BY GEOGRAPHIC AREA The Company operates principally in the telecommunications industry. It manufactures products in the United States and France and markets in North America, Europe and other areas of the world. A summary of operations by geographic area follows (in thousands):
Six Months Year Ended Year Ended Ended June 30, 12/31/96 12/31/95 12/31/94 1994 -------- -------- -------- ---- Sales to Unaffiliated Customers from: United States $ 6,825 $ 8,255 $ 4,071 $ 12,621 France 9,478 10,097 5,860 9,027 -------- -------- -------- -------- $ 16,303 $ 18,352 9,931 $ 21,648 ======== ======== ======== ======== Transfers from United States to France $ 16 $ 118 $ $ 158 ======== ======== ======== ======== Net Income (Loss): United States (3,599) $ (766) (286) $ (698) France (998) 99 584 59 -------- -------- -------- -------- $ (4,597) $ (667) $ 298 $ (639) ======== ======== ======== ========
F-15 56
Six Year Months Ended Year Ended Ended June 30, 12/31/96 12/31/95 12/31/94 1994 ------------------ -------- -------- Identifiable Assets at Year End: United States $ 3,794 $ 4,786 $ 5,174 $ 5,268 France 5,525 6,539 6,632 6,054 ------- ------- ------- ------- $ 9,319 $11,325 $11,806 $11,322 ======= ======= ======= =======
Transfer prices are established to allow a reasonable profit to the selling entity. Identifiable assets are those assets of the Company that are identified with the operations in each geographic area. Export sales to unaffiliated customers from the United States were approximately $333,000 for 1996, $381,000 for l995, $149,000 for the six months ended December 31, l994, and $881,000 in fiscal year l994. 5. INVENTORIES Inventories consist of the following (in thousands) at December 31:
1996 l995 ------- ------- Finished Goods $ 2,369 $ 2,620 Work-in-Process 683 1,135 Parts 1,653 1,817 Reserves (1,701) (1,424) ------- ------- $ 3,004 $ 4,148 ======= =======
6. PLANT AND EQUIPMENT Plant and equipment consist of the following (in thousands) at December 31:
1996 l995 ------- ------- Land and Buildings $ 374 $ 403 Machinery, Equipment, Furniture and Fixtures 2,413 2,431 ------- ------- 2,787 2,834 Accumulated Depreciation and Amortization (2,261) (2,125) ------- ------- $ 526 $ 709 ======= =======
F-16 57 Plant and equipment includes assets leased under capital leases of approximately $92,000 at December 31, 1996 and 1995, respectively. Accumulated depreciation on these items at December 31, 1996 and 1995 was $42,000 and $36,000. 7. INCOME TAXES Effective July l, l993, the Company adopted Statement of Financial Accounting Standards No. 109 ("FAS l09"), "Accounting for Income Taxes." Under FAS l09, a deferred tax asset or liability is determined based on the differences between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. The adoption of FAS l09 had no material effect on the Company's financial position or results of operations for the year ended June 30, l994. Pre-tax income (loss) from operations for the following periods was taxed under the following jurisdictions (in thousands):
Six Months Year Ended Year Ended Ended June 30, 12/31/96 2/31/95 12/31/94 1994 -------- ------- -------- ------- Domestic $(3,599) $ (766) $ (286) $(1,105) Foreign (1,083) (52) 584 466 ------- ------- ------- ------- $(4,682) $ (818) $ 298 $ (639) ======= ======= ======= =======
The income tax expense (benefit) differs from the amount of income tax expense (benefit) determined by applying the statutory Federal rate to pre-tax income (loss) as follows (in thousands):
Six Months Ended Year Ended Year Ended Dec 31, Dec 31, June 30, 1996 1995 l994 1994 ------- ------- ------- ------- Tax expense (benefit) at the Statutory Federal Rate $(1,563) $ (278) $ 101 $ (217) Net Operating Losses (75) (68) Change in Valuation Allowance 1,478 127 (26) 285 ------- ------- ------- ------- $ (85) $ (151) $ -- $ -- ======= ======= ======= =======
The tax benefits for the year ended December 31, 1996 and l995 are a result of research and development credits allowed in France. F-17 58 During the six months ended December 31, l994, the Company utilized foreign net operating loss carryforwards of approximately $225,000 to reduce foreign income tax expense by approximately $75,000. At December 3l, l996 the Company had net operating loss carryforwards for Federal and state tax purposes totaling approximately $19,900,000 and $4,800,000, respectively. These carryforwards are available to reduce Federal and state taxable income through 2011 and 2001, respectively. The foreign net operating loss carryforward for statutory tax reporting purposes at December 31, 1996 was approximately $2,200,000 and expires through 2001. In addition, the Company has a Federal net operating loss carryforward of approximately $4,300,000 arising from an acquired company. As discussed in Note 13, subsequent to December 31, 1996, the Company entered into a merger transaction. This transaction will limit the domestic net operating loss carryover to approximately $265,000 per year. At December 3l, l996 the Company has investment tax credits and research and development credits totaling $682,000 and $385,000, which expire through 2005. These tax credits are subject to certain limitations. Deferred tax assets are comprised of the following (in thousands) at December 31:
1996 1995 ------- ------- Deferred Tax Asset: Net Operating Loss Carryforwards $ 8,684 $ 7,116 Capitalized Software (175) (187) Plant and Equipment (6) 25 Accruals and Reserves Recognized in Different Periods 1,338 1,063 Valuation Allowance (9,841) (8,017) ------- ------- Total $ -- $ -- ======= =======
A valuation allowance has been provided to reduce recorded total possible future tax benefits to zero as the Company's recent history of operating losses does not support a judgment that the deferred tax assets are more likely than not to be realized in the future. Consequently, no tax benefits were recognized for the Company's domestic and foreign operating losses during the periods presented. Further, these tax benefits will be recognized the earlier of when realized in future periods or when future profitability of the Company appears sufficiently probable that it appears more likely than not that the benefits will be realized. The changes in the valuation allowance for all periods presented are due primarily to additional net operating losses incurred and expiration of existing net operating loss carryforwards. F-18 59 8. BORROWING ARRANGEMENTS The Company's borrowing arrangements consist of the following (in thousands) at December 31:
1996 1995 ------ ------ Short-term Borrowings Borrowing under U.S. Factoring Line of Credit $ 589 $ 759 Borrowing under Working Capital Lines of Credit for CXR S.A 553 ------ ------ Notes Payable to Banks $1,142 $ 759 ====== ====== Long-term Debt Term Loan, Interest at 10.5% Due January 1997 Secured by Land and Building 30 168 Capital lease obligations (see Note 9) 50 56 ------ ------ 80 224 Current Portion of Long-term Debt 44 170 ------ ------ Long-term Debt $ 36 $ 54 ====== ======
During 1996, the Company's U.S. subsidiary renegotiated its bank credit facility, which had matured in June, 1996. Under its prior revolving line of credit, borrowings were based on eligible receivables and inventory with a maximum borrowing limit of $1,000,000. The line of credit bore interest at prime plus 4% (12 1/2% at December 31, 1995), was collateralized by accounts receivable and inventories and was guaranteed by the Company. The revolving line of credit was replaced by a factoring line of credit with the same bank. Borrowings under the factoring line of credit are based on an advance rate of 85% of eligible receivables with no maximum cap. The line bears interest at prime plus 2% (10.25% at December 31, 1996) and an administrative fee of 1% per month charged on the average factored invoiced balance for invoice processing. At December 31, 1996, the U.S. subsidiary had additional available borrowings of $158,000 under this line. F-19 60 The Company's French subsidiary has bank lines of credit approximating $1,145,000 at December 31, 1996, with available borrowings based on eligible accounts receivable. Borrowings under the related agreements bear interest at 5.0 - 8.6%, and at December 31, 1996, approximately $370,000 of additional borrowings were available under the lines. 9. LEASES The Company leases certain of its facilities under non-cancelable operating leases expiring through May 1998. Rent expense for the years ended December 31, 1996 and 1995, the six months ended December 31, l994 and the year ended June 30, 1994 was approximately $363,000, $380,000, $168,000 and $869,000, respectively. In May l994, the Company negotiated an early termination of its lease on its 90,000 square foot U.S. facility, and leased 40,000 square feet for 39 months. The Company had previously been accruing rent on this facility on a straight-line basis, resulting in a deferred liability for future rent payments. The reversal of the remaining liability, net of lease termination costs, resulted in a $108,000 gain, which is included in other income for the year ended June 30, l994. Future minimum lease payments required under operating lease agreements and future minimum lease payments under capital lease obligations together with the present value of minimum payments are as follows (in thousands):
Years Ending December 31, Operating Capital Leases Lease ------ ----- 1997 $297 $14 1998 71 14 1999 - 14 2000 - 14 2001 - 7 ---- --- Total minimum payments $368 63 ==== Less amount representing interest 13 --- Present value of minimum lease payments $50 ===
10. COMMITMENTS AND CONTINGENT LIABILITIES Under the terms of its acquisition of Anderson Jacobson, Inc. in fiscal 1989, the Company assumed the liability for certain deferred compensation arrangements (the Plan). During l993 the beneficiaries of the Plan and the Company renegotiated the future payments required under the Plan, and the annual payments were reduced to $173,000. Payment to the individual recipients generally were reduced 50% and the terms of the agreements range from five years to 14 years, with one agreement covering the remaining life of the recipient. At December 31, 1996, recorded obligations for deferred compensation related to these arrangements totaled $1,244,000. The amounts recorded are generally based on the estimated present value of the future required payments, discounted at 8.5%, and assuming annual CPI increases of 3.3%, and further include estimated costs to settle the dispute with one Plan participant as described below. Based on F-20 61 ongoing settlement discussions, the Company recorded additional costs of $344,000 in the fourth quarter of 1996 with respect to this matter. In September, 1994 Raymond Jacobson, a former officer and director of the Company and one of the Plan participants, brought an action against the Company in the California Superior Court, Santa Clara County, alleging that the Company has breached its contract to pay Mr. Jacobson $3,495 bi-weekly for life under his deferred compensation agreement dated May 11, 1993 (the "1993 Agreement"), by discontinuing payment in August 1994. The 1993 Agreement superseded a previous deferred compensation agreement dated April 1, 1997 (the "1997 Agreement") which had provided for twice the level of payments. Mr. Jacobson was claiming damages of approximately $1,200,000, which he purported to be the present value of all payments to be made under the 1993 Agreement. In June 1995 the Company paid Mr. Jacobson all amounts past due under the contract plus interest and reinstated the bi-weekly payments. On May 20, 1996, Daniel Dror & Co, Inc. ("DDC"), instituted a suit against Mr. Jacobson in the District Court for Galveston County, Texas alleging damages arising from DDC's investment of more than $2,000,000 for the purchase of 1,072,000 shares of the Company's common stock. On February 11, 1997, Mr. Jacobson, through his attorney, demanded that the Company indemnify him, hold him harmless and pay for the cost of defense, including reasonable attorney's fees and costs in connection with the litigation instituted against him by DDC. The Company believes that it has a reasonable basis to deny Mr. Jacobson's claim for indemnification in part or in whole. On February 14, 1997, Mr. Jacobson, through his attorney, gave notice to the Company that he believed that the litigation instituted against him by DDC provided a basis for him to rescind the 1993 Agreement and assert his rights to full payment under the 1977 Agreement. The Company's litigation counsel believes that while Mr. Jacobson's allegations may be sufficient to withstand a summary motion for dismissal of the claim, no conclusion can be drawn as to his likelihood of success on the merits of the claim. Notwithstanding the above, the Company management and Mr. Jacobson have conducted settlement discussions since June 1996, and the Company believes that an enforceable settlement was reached on January 22, 1997. Mr. Jacobson apparently disclaims this agreement based on the actions noted above. On February 28, 1997 the Company filed a motion for continuance to file a counterclaim that the January 22, 1997 agreement supersedes all previous agreements with Mr. Jacobson. A court supervised settlement conference with Mr. Jacobson was held on March 26, 1997. Although a tentative settlement was reached, the settlement was subject to fulfillment of a number of conditions subsequent. If one or more of these conditions subsequent are not satisfied, the settlement will not be binding on the parties. A trial in the matter has been scheduled for August 25, 1997. The Company does not believe that the value of a settlement in the matter will be materially in excess of amounts already recorded by the Company for the deferred compensation arrangement. F-21 62 In October 1996, David Scheinfeld brought an action in the Supreme Court of the State of New York, County of New York, to recover monetary damages in the amount of $300,000 allegedly sustained by the failure of the Company, its stock transfer agent and its counsel to timely deliver and register 30,000 shares of Common Stock for which payment had been made. The Company was informed by David Scheinfeld that in order to settle his claims, the Company would have to issue him unrestricted shares of common stock. Since the Company cannot issue unrestricted shares (absent registration), the Company has answered Mr. Scheinfeld's motion and is seeking to compel him to serve a complaint upon the defendants. The Company is subject to other legal proceedings and claims which have arisen in the ordinary course of business. Although the ultimate outcome of these as well as the matters noted above cannot be predicted with certainty, pending actual resolution, in the opinion of management, the disposition of these matters will not have a material adverse affect on the consolidated financial statements. 11. STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS The Company has outstanding options on its Common Stock issued under the following arrangements: o Employee Stock and Stock Option Plan, effective July 1, 1994, providing for non-qualified stock options as well as restricted and non-restricted stock awards to both employees and outside consultants. Up to 520,000 shares may be granted or optioned under this plan. Terms of related grants under the plan are at the discretion of the Board of Directors. o Stock Option Plan adopted in 1993, providing for the granting of up to 300,000 incentive stock options to purchase stock at not less than the current market value on the date of grant. Options granted under this plan vest ratably over three years and expire 10 years after date of grant. o A superseded Stock Option Plan adopted in 1986, under which no further options may be granted. In addition, during 1996 the Company granted certain non-qualified options and restricted stock not pursuant to a formal plan (See Note 2). The Company accounts for stock-based compensation under the "intrinsic value" method. Under this method, no compensation expense is recorded for these plans and arrangements for current employees whose grants provide for exercise prices at or above the market price on the day of grant. Compensation or other expense is recorded based on intrinsic value (excess of market price over exercise price on date of grant) for employees, and fair value of the option awards for others. F-22 63 The following table shows activity in the outstanding options.
Year Ended December 31, 1996 ---------------------- Six Months Weighted Ended Year Ended Average December June 30, Exercise 1995 31, 1994 1994 Shares Price Shares Shares Shares --------- ------ ------- ------- ------- Outstanding at beginning of year 401,510 $2.84 128,910 74,843 112,626 Granted 1,319,900 1.93 296,600 60,000 104,500 Exercised (507,896) 0.87 (3,300) -- (92,766) Canceled (67,142) 2.59 (20,700) (5,933) (49.517) --------- ------- ------- ------- Outstanding at end of year 1,146,372 $2.68 401,510 128,910 74,843 ========= ======= ======= ======
Weighted average exercise prices for 1996 are calculated at prices effective as of December 31, 1996, including the effect of repricing of certain options in 1996. The fair value of options granted during 1996 was $1,797,000, at a weighted average value of $1.36 per share, including $767,000 attributable to 500,000 options granted at amounts less than market. The incremental fair value of 170,000 options repriced or extended in 1996 over their fair values immediately before modification was $102,000. Total amounts recorded for book purposes for less-than-market awards and non-employee awards were $1,350,000 in 1996. Exercise prices for options outstanding as of December 31, 1996 generally ranged from $2.38 to $3.44 per share. The following table shows information for options outstanding or exercisable as of December 31, 1996:
Options Options Outstanding Exercisable ----------- ----------- Number of Shares 1,146,372 1,088,072 Weighted Average Remaining Contractual Life 4.7 years 4.7 years Weighted Average Exercise Price $2.68 $2.65
If the Company had instead elected the fair value method of accounting for stock-based compensation, compensation cost would be accrued at the estimated fair value of all stock option grants over the service period, regardless of later changes in stock prices and price volatility. The fair value at date of grant for options granted in 1996 and 1995 has been estimated based on a modified Black-Scholes pricing model with the following assumptions: no dividend yield F-23 64 for any year; expected volatility for 1996 and 1995 grants of approximately 56% and 61%, based on historical results; risk-free interest rates of 6.6% and 6.65% for 1996 and 1995 grants; and average expected lives of approximately three years for both 1996 and 1995. The following table shows net loss and loss per share for 1995 and 1996 as if the Company had elected the fair value method of accounting for stock options.
in thousands except per-share amts 1996 1995 ---- ---- Net Loss, as Reported $ (4,597) $ (667) Additional Incremental Compensation Expense (557) (336) ----- ----- Net Loss, as Adjusted $ (5,154) $ (1,003) ======= ======= Net Loss per Share, as Reported $ (1.65) $ (0.25) Additional Incremental Compensation Expense (0.20) (0.13) ------ ------ Net Loss per Share, as Adjusted $ (1.85) $ (0.38) ====== ======
Additional incremental compensation expense includes the excess of fair values of options granted during the year over any compensation amounts recorded for options whose exercise prices were less than the market value at date of grant, and for any expense recorded for non-employee grants. Additional incremental compensation expense also includes the excess of the fair value at modification date of options repriced or extended over the value of the old options immediately before modification. All such incremental compensation is amortized over the related vesting period, or expensed immediately if fully vested. The above calculations include only the effects of 1995 and 1996 grants. Because options often vest over several years and additional awards are made each year, the results shown above may not be representative of the effects on net earnings or losses in future years. In addition, at December 31, 1996, the Company has outstanding 122,000 warrants to purchase stock at $2.50 per share, expiring in varying amounts through 2003. During 1996, 18,000 warrants were exercised at $2.50 per share. The Company has an Employee Stock Purchase Plan allowing eligible employees to purchase shares of the Company's common stock at 85% of market value. At December 31, l995, 6,180 shares had been issued pursuant to the plan with 38,820 shares reserved for future issuance. The Company has a 401(k) tax deferred saving plan whereby eligible employees may elect to contribute a portion of their salaries. Company contributions are made at the discretion of the Board of Directors. The Company's contributions to the plan were $35,000, $41,000, $20,000, and $49,000 for 1996, 1995, the six months ended December 3l, l994 and the fiscal year ended June 30, l994, respectively. 12. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS For the three months ended December 31, 1996, the Company reported a net loss of $(3,656,000) or $(1.32) per share. These results were impacted by the following adjustments: F-24 65 Severance and related settlement costs $1,567,000 Write-down of assets 1,006,000 Estimated costs of litigation settlements 475,000 ---------- $3,048,000 ==========
Severance and related settlement costs represent the aggregate value of $678,000 of the stock and stock options awarded to the Company's former Chairman, Daniel Dror, upon his resignation in November 1996, costs of $807,000 related to the settlement of the subscription receivable from Elk, and other costs totaling $82,000 related to the immediate vesting of previous stock based deferred compensation to Mr. Dror and the settlement of certain amounts due the Company by Mr. Dror (see also Note 2). The write-down of assets consists of reductions of $376,000 and $630,000 in the carrying value of certain inventory and capitalized software development costs, respectively, to their net realizable value. These write-downs charged to cost of sales resulted from the Company's reassessment of the anticipated near-term impact of current industry and economic factors on the Company's operations. CXR Telcom's sales continue to be negatively impacted by delays in buying by its principal customers, as a result of the consolidation and/or restructuring of these companies in the wake of the passage of the Telecommunications Bill of 1996; and CXR SA's sales continue to be impacted by a decline in sales to France Telecom during its pre-privatization reorganization and a generally weak French economy. Additionally, sales for both operating subsidiaries have been negatively impacted by the rapid obsolescence of the analog-based components of their product lines, particularly older transmission products; and further, both sales and margins have been impacted by extreme price competition for transmission products in general. Estimated costs of litigation settlements are comprised of the expected incremental costs of $344,000 to settle the dispute regarding Mr. Jacobson's deferred compensation agreement (see Note 10) and $131,000 for a contingent payment related to a price guarantee in a stock based settlement of another dispute reached in the fourth quarter of 1996. These estimated costs are included in administrative expenses in the accompanying Consolidated Financial Statements. The aggregate effect of the above adjustments was to increase the net loss per share for the fourth quarter of 1996 by $(1.10) per share. 13. OTHER SUBSEQUENT EVENTS MERGER WITH XIT CORPORATION On March 26, 1997, XIT Corporation ("XIT") of Ontario, California merged with a wholly-owned, newly formed subsidiary of the Company, with XIT as the surviving subsidiary. Pursuant to the transaction, the former shareholders of XIT were issued approximately 6,199,215 shares of common stock of the Company, or approximately 65.8% of the issued and outstanding common stock. In addition, holders of XIT stock options and warrants collectively have the right to acquire an additional 2,153,240 shares of MicroTel Common Stock. Collectively, then the former XIT shareholders own, or have the right to acquire, F-25 66 approximately 65% of the Common Stock of the Company on a fully-diluted basis as of the date of the transaction XIT, with vertically integrated operations in the U.S., England and Japan, designs, manufactures and markets information display and input products and printed circuit boards for the international telecommunications, medical, industrial and military/aerospace markets. The merger will be accounted for as a purchase of the Company by XIT in a "reverse acquisition" because the existing shareholders of the Company prior to the merger will not have voting control of the combined entity. In a reverse acquisition, the accounting treatment differs from the legal form of the transaction, as the continuing legal parent company, the Company, is not assumed to be the acquiror and the financial statements of the combined entity are those of the accounting acquiror (XIT), including any comparative prior year financial statements presented by the combined entity after the business combination. The following represents the unaudited pro forma results of operations as if the merger had occurred at the beginning of the periods presented and combines the Company's results of operations for the years ended December 31, 1996 and 1995 with those of XIT's for its years ended September 30, 1996 and 1995, respectively, with adjustments to reflect amortization of the estimated excess cost over the fair value of the net assets acquired.
(in thousands, except per share amounts) 1996 1995 -------- -------- Net sales $ 47,551 $ 37,954 Net loss $ (3,617) $ (433) ======== ======== Net loss per common share $ (.40) $ (.05) ======== ========
The proforma results of operations above does not purport to be indicative of the results that would have occurred had the merger taken place at the beginning of the periods presented or of results which may occur in the future. PRIVATE PLACEMENT OF SECURITIES On February 20, 1997, the Company accepted a commitment from Yorkton Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its best efforts to raise a minimum of $5,000,000 and a maximum of $10,000,000 through a private placement of investment units consisting of one share of restricted common stock and one quarter of a warrant to purchase one share of restricted common stock. The pricing of the units is based on a 20% discount from the ten day average closing bid price of the Company's common stock preceding the date of contracting with the institutional investors (the "Average Reported Price"), with a minimum price per unit of $2.50 and maximum price of $3.50. The investors warrants have an exercise price of 130% of the Average Reported Price. Additionally, Yorkton and one other intermediary earn an aggregate commission of 10% of the gross proceeds and warrants to acquire 10% of the shares purchased in the offering at an exercise price of the lesser of the Average Reported Price or F-26 67 $3.50 per share, and Yorkton further is reimbursed for accountable expenses of the offering up to 2% of the gross proceeds. On April 14, 1997, a first closing occurred on 2,000,000 investment units, for gross proceeds of $5,000,000. Net proceeds to the Company were $4,400,000. The offering, which is structured to accommodate multiple closings, would terminate on the earlier of i) the date the maximum offering of $10,000,000 is contracted or ii) April 18, 1997, unless extended by the mutual agreement of the Company and Yorkton. The Company anticipates that the net proceeds of the offering will be utilized for working capital purposes, including product development and marketing, and for the acquisition of companies and intellectual property rights which will provide extensions of the Company's product lines. F-27 68 MICROTEL INTERNATIONAL, INC. VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Balance at Charged to Deductions Beginning Costs and Writeoffs of Balance End of Period Expenses Accounts of Period ALLOWANCE FOR DOUBTFUL ACCOUNTS Year ended December 31, 1996 $ 425 ($175) ($64) 186 Year ended December 31, 1995 405 42 (22) 425 Six months ended December 31, 1994 548 (100) (43) 405 Year ended June 30, 1994 771 137 (360) 548 ALLOWANCE FOR INVENTORY OBSOLESCENCE Year ended December 31, 1996 $1,424 $599 ($322) $1,701 Year ended December 31, 1995 1,598 288 (462) 1,424 Six months ended December 31, 1994 2,243 108 (753) 1,598 Year ended June 30, 1994 3,484 560 (1,801) 2,243
F-28 EX-3.3 2 CERTIFICATE OF AMEND. OF CERT. OF INCORPORATION 1 EXHIBIT 3.3 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF MICROTEL INTERNATIONAL INC. The undersigned, being, respectively, Chief Executive Officer and Secretary of MicroTel International, Inc., a Delaware corporation (the "Corporation"), do hereby certify as follows: FIRST: That the Board of Directors of the Corporation adopted a resolution proposing and declaring advisable a reverse split of the Corporation's Common Stock, $.0033 par value per share, on a one-for-five basis (without modification in par value), and an increase in the total number of shares of preferred stock authorized by adoption of the following amendment to the Certificate of Incorporation of said corporation: "FOURTH: The aggregate number of shares of all classes of capital stock which the Company has the authority to issue is thirty (35,000,000), which is divided into two classes as follows: Twenty-Five Million (25,000,000) shares of Common Stock (Common Stock) with a par value of 1/3 cent per share, and Ten Million (10,000,000) shares of Preferred Stock (Preferred Stock) with a par value of $.01 per share. The designations, voting powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions of the Preferred Stock is as follows: (1) Issuance in Series. Shares of Preferred Stock may be issued in one or more series at such time or times, and for such considerations as the Board of Directors may determine. All shares of any one series of Preferred 2 Stock will be identical with each other in all respects, except that shares of one series issued at different times may differ as to dates from which dividends thereon may be cumulative. All series will rank equally and be identical in all respects, except as permitted by the following provisions of paragraph 2 of this Article FOURTH. (2) Authority of the Board with Respect to Series. The Board of Directors is authorized, at any time and from time to time, to provide for the issuance of the shares of Preferred Stock in one or more series with such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof as are stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors, and as are not stated and expressed in this Certificate of Incorporation or any amendment hereto including, but not limited to, determination of any of the following: (i) The number of shares constituting that series and the distinctive designation of that series; (ii) The dividend rate or rates on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, the payment date or dates for dividends and the relative rights of priority, if any, of payment of dividends on shares of that series; (iii) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (iv) Whether that series shall have conversion privileges and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (v) Whether or not the share of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or date upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (vi) Whether that series shall have a sinking or retirement fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking or retirement fund; (vii) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Company, and the relative rights of priority, if any, of payment of shares of that series; 3 (viii) Any other preferences, privileges and powers, and relative participating, optional or other special rights, and qualifications, limitations or restrictions of a series, as the Board of Directors may deem advisable and are not inconsistent with the provisions of this Certificate of Incorporation. (3) Dividends. Dividends on outstanding shares of Preferred Stock shall be paid or declared and set apart for payment in accordance with their respective preferential and relative rights before any dividends shall be paid or declared and set apart for payment on the outstanding shares of Common Stock with respect to the same dividend period. (4) Liquidation. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the assets available for distribution to holders of shares of Preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series of Preferred Stock in accordance with the respective preferential and relative amounts (including unpaid cumulative dividends, if any) payable with respect thereto. (5) Reacquired Shares. Shares of Preferred Stock which have been issued and reacquired in any manner by the Company (excluding, until the Company elects to retire them, shares which are held as treasury shares but including shares redeemed, shares purchased and retired, and shares which have been converted into shares of Common Stock) will have the status of authorized and unissued shares of Preferred Stock and may be reissued. (6) Voting Rights. Shares of Preferred Stock shall each have the number of votes provided in the resolution or resolutions of the Board of Directors creating any series of Preferred Stock, or as otherwise required by law. Unless and except to the extent otherwise required by law or provided in the resolution or resolutions of the Board of Directors creating any series of Preferred Stock, the holders of the Preferred Stock shall have no voting power with respect to any matter whatsoever." SECOND: The foregoing amendment has been duly adopted by the stockholders of the Corporation in accordance with Section 242 of the General Corporation Law of the State of Delaware. 4 IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Daniel Dror, its Chief Executive Officer, and attested by Barry Reifler, its Secretary, this 29th day of August, 1996. /s/ Daniel Dror ---------------------------------------- Daniel Dror Chief Executive Officer ATTEST: /s/ Barry Reifler - ----------------------------------- Barry Reifler, Secretary EX-10.11 3 WARRANT TO PURCHASE COMMON STOCK/YORKTON SEC. 1 Exhibit 10.11 THE WARRANTS REPRESENTED BY THIS CERTIFICATE ("WARRANTS") AND THE UNDERLYING WARRANT SHARES ("WARRANT SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE WARRANTS MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON, THE WARRANTS AND WARRANT SHARES MAY NOT BE OFFERED OR SOLD TO ANY U.S. PERSON, THE WARRANTS MAY NOT BE EXERCISED IN THE UNITED STATES (EXCEPT AS PERMITTED BY REGULATION S), AND THE WARRANT SHARES MAY NOT BE DELIVERED IN THE UNITED STATES, UNLESS, IN EACH CASE, THE WARRANTS AND WARRANT SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE, AS EVIDENCED BY AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY. THE WARRANTS REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED, SOLD, PLEDGED, HYPOTHECATED OR ENCUMBERED EXCEPT UNDER THE LAWS OF DESCENT AND DISTRIBUTION OR BY OPERATION OF LAW. WARRANTS TO PURCHASE COMMON STOCK MICROTEL INTERNATIONAL, INC., a Delaware corporation (the "Company") hereby grants to Yorkton Securities, Inc. (the "Holder") _____________________ (____) non-transferable warrants (the "Warrants") for the purchase of common stock of the Company (the "Common Stock"), with each whole Warrant entitling the Holder to purchase one share of Common Stock (each a "Warrant Share" and collectively the "Warrant Shares") on the terms and subject to the conditions set forth herein. The Warrants have been issued pursuant to an Agency Agreement dated for reference purposes as of March 21, 1997 entered into between the Holder and the Company (the "Agency Agreement") and as part of a larger private offering by the Company described in that certain Confidential Offering Memorandum of the Company dated March 21, 1997. 1. TERM. The Warrants may be exercised, in whole or in part, at any time and from time to time from the date hereof until 5:00 Pacific Time on ___________, 2000 (the "Exercise Period"). 2. EXERCISE PRICE. The initial exercise price of each whole Warrant shall be $2.66 (the "Exercise Price"). The Exercise Price shall be subject to adjustment as provided in Section 10. 3. EXERCISE OF WARRANTS. The Warrants are exercisable on the terms provided herein at any time during the Exercise Period by the surrender of this certificate to the Company at its principal office together with the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder, accompanied by payment in full, in immediately available funds, of the amount of the aggregate Exercise Price of the Warrant Shares being purchased upon such exercise. The Holder shall be deemed the record owner of such Warrant Shares as of and from 1 2 the close of business on the date on which this certificate is surrendered together with the completed Notice of Exercise and payment in full as required above (the "Exercise Date"). The Company agrees that the Warrant Shares so purchased shall be issued as soon as practicable thereafter. It shall be a condition to the exercise of the Warrants that the Holder or any transferee hereof certify to the Company, at the time of exercise, either that the Holder is not a U.S. person (as defined in Regulation S under the Securities Act) and that the Warrants are not being exercised on behalf of a U.S. person, or to provide an opinion of counsel reasonably satisfactory to the Company that the Warrants and the Warrant Shares to be delivered upon exercise thereof have been registered under the Securities Act or that an exemption from the registration requirements of the Securities Act is available. It shall be a further condition to the exercise of the Warrants that the Warrants may not be exercised in the United States and the Warrant Shares may not be delivered in the United States absent registration under the Securities Act or an available exemption from registration, unless otherwise permitted by Regulation S. 4. FRACTIONAL INTEREST. In lieu of issuing fractional shares of Common Stock upon exercise of the Warrants, the Company may pay the Holder a cash amount determined by multiplying the fraction of a share otherwise issuable by the Fair Market Value of one share of Common Stock. For this purpose, "Fair Market Value" means the average closing sale price for the ten trading days immediately preceding the Exercise Date or, if there is no last-sale reporting for the Common Stock at such time, then the value as determined in good faith by the Board of Directors of the Company. 5. WARRANTS CONFER NO RIGHTS OF STOCKHOLDER. The Holder shall not have any rights as a stockholder of the Company with regard to the Warrant Shares prior to the Exercise Date for any actual purchase of Warrant Shares. 6. INVESTMENT REPRESENTATION. Neither the Warrants nor the Warrants Shares issuable upon the exercise of the Warrants have been registered under the Securities Act or any state securities laws. The Holder acknowledges by acceptance of this certificate that, as of the date of this Warrant and at the time of exercise, (a) the Holder has acquired the Warrants or the Warrant Shares, as the case may be, for investment and not with a view to distribution; and either (b) the Holder has a pre-existing personal or business relationship with the Company or its executive officers, or by reason of the Holder's business or financial experience the Holder has the capacity to protect the Holder's own interests in connection with the transaction; and (c) the Holder is an accredited investor as that term is defined in Rule 501(a) of Regulation D under the Securities Act. The Holder agrees, by acceptance of this certificate, that any Warrant Shares purchased upon exercise of the Warrants may have to be held indefinitely, until registered and qualified for resale pursuant to Section 7, or until an exemption from registration is available, as evidenced by an opinion of counsel reasonably satisfactory to the Company. The Holder, by acceptance of this certificate, consents to the placement of a restrictive legend (the "Legend") on the certificates representing any Warrant Shares that are purchased upon exercise of the Warrants during the applicable restricted period under Regulation S or any other applicable restricted period under the Securities Act. The Legend shall be in substantially the following form: 2 3 THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS ("STATE LAWS") OR ANY SECURITIES LAWS OF JURISDICTIONS OUTSIDE OF THE UNITED STATES, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE UNITED STATES OR TO A "U.S. PERSON," AS THAT TERM IS DEFINED IN REGULATION S UNDER THE SECURITIES ACT, EXCEPT (1) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT COVERING THE SECURITIES, OR (2) UPON DELIVERY TO THE COMPANY OF AN OPINION OF U.S. COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THE SECURITIES MAY BE TRANSFERRED WITHOUT REGISTRATION PURSUANT TO (A) RULE 144, RULE 144A, OR RULE 904 OF REGULATION S PROMULGATED UNDER THE SECURITIES ACT OR (B) ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT. 7. REGISTRATION RIGHTS. The Warrant Shares which are purchasable upon exercise of the Warrants are entitled to the registration rights which are set forth in Section 9 of the Agency Agreement. 8. RESERVATION OF SHARES. The Company agrees that, at all times during the Exercise Period, the Company will have authorized and reserved, for the exclusive purpose of issuance and delivery upon exercise of the Warrants, a sufficient number of shares of its Common Stock to provide for the issuance of the Warrant Shares. 9. ADJUSTMENT FOR CHANGES IN CAPITAL STOCK. If the Company at any time during the Exercise Period shall, by subdivision, combination or reclassification of securities, change any of the securities into which the Warrants are exercisable into the same or a different number of securities of any class or classes, the Warrants shall thereafter entitle the Holder to acquire such number and kind of securities as would have been issuable as a result of such change with respect to the Warrant Shares if the Warrant Shares had been outstanding immediately prior to such subdivision, combination, or reclassification. If shares of the Company's Common Stock are subdivided into a greater number of shares of Common Stock, the Exercise Price for the Warrant Shares upon exercise of the Warrants shall be proportionately reduced and the number of Warrant Shares shall be proportionately increased; and conversely, if shares of the Company's Common Stock are combined into a smaller number of shares of Common Stock, the Exercise Price shall be proportionately increased, and the number of Warrant Shares shall be proportionately decreased. 3 4 10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF CERTIFICATE. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any certificate representing the Warrants or the Warrant Shares (referred to herein as the "original certificate"), and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to the Company, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the original certificate if mutilated, the Company will make and deliver a new certificate of like tenor in lieu of the original certificate. 11. ASSIGNMENT. The Warrants may not be transferred, sold, pledged, hypothecated or encumbered except under the laws of descent and distribution or by operation of law. The Warrants may not be exercised by or on behalf of any U.S. person, the Warrants and Warrant Shares may not be offered or sold to any U.S. person, the Warrants may not be exercised in the United States (except as permitted by Regulation S), and the Warrant Shares may not be delivered in the United States, unless, in each case, the Warrants and Warrant Shares have been registered under the Securities Act or an exemption from such registration is available, as evidenced by an opinion of counsel reasonably satisfactory to the Company. 12. GENERAL. This certificate shall be governed by and construed in accordance with the laws of the State of California applicable to contracts between California residents entered into and to be performed entirely within the State of California. The headings herein are for purposes of convenience and reference only and shall not be used to construe or interpret the terms of this certificate. The terms of this certificate may be amended, waived, discharged or terminated only by a written instrument signed by both the Company and the Holder. All notices and other communications from the Company to the Holder shall be mailed by first-class registered or certified mail, postage pre-paid, to the address furnished to the Company in writing by the last Holder who shall have furnished an address to the Company in writing. Dated: April , 1997 MICROTEL INTERNATIONAL, INC. By: /s/ Carmine T. Oliva ----------------------------------------- (Authorized Signature) President and CEO ----------------------------------------- (Name and Title) 4 5 NOTICE OF EXERCISE To: MicroTel International, Inc. (the "Company") 1. The undersigned hereby elects to exercise a total of ___________ Warrants for the purchase of a like number of Warrant Shares, and tenders herewith payment of the Exercise Price for such shares in full. 2. In exercising the Warrants, the undersigned hereby confirms and acknowledges that the Warrant Shares are being acquired solely for the account of the undersigned for investment, and that the undersigned will not offer, sell or otherwise dispose of any of the Warrant Shares unless the Warrant Shares have been registered under the Securities Act or an exemption from such registration is available, as evidenced by an opinion of counsel reasonably satisfactory to the Company. 3. The undersigned hereby certifies that either (i) the undersigned is not a U.S. person (as such term is defined in Regulation S under the Securities Act), or (ii) the undersigned has delivered to the Company an opinion of counsel to the effect that the Warrants and the Warrant Shares have been registered under the Securities Act or an exemption from such registration is available. 4. The undersigned further certifies that the Warrants are not being exercised in the United States and understands and agrees that the Warrant Shares may not be delivered in the United States, except as permitted by Regulation S, absent registration under the Securities Act or an available exemption from such registration. 5. Please issue a certificate representing the Warrant Shares in the name of the Holder and deliver the certificate to the address set forth below. 6. Please issue a new certificate representing the unexercised portion (if any) of the Warrants in the name of the Holder and deliver the certificate to the address set forth below. Dated: _____________________ ____________________________________________ (Name of Holder) ____________________________________________ (Authorized Signature) Address for Delivery: ____________________________________________ ____________________________________________ ____________________________________________ ____________________________________________ 5 EX-10.12 4 WARRANT TO PURCHASE COMMON STOCK/ENTRENET GROUP 1 Exhibit 10.12 THE WARRANTS REPRESENTED BY THIS CERTIFICATE ("WARRANTS") AND THE UNDERLYING WARRANT SHARES ("WARRANT SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE WARRANTS MAY NOT BE EXERCISED OFFERED OR SOLD UNLESS, IN EACH CASE, THE WARRANTS AND WARRANT SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE, AS EVIDENCED BY AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY. THE WARRANTS REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED, SOLD, PLEDGED, HYPOTHECATED AND ENCUMBERED SUBJECT TO THE PROVISIONS CONTAINED HEREIN. WARRANTS TO PURCHASE COMMON STOCK MICROTEL INTERNATIONAL, INC., a Delaware corporation (the "Company") hereby grants to the entrenet Group, L.L.C. (the "Holder") __________________ (_______) transferable warrants (the "Warrants") for the purchase of common stock of the Company (the "Common Stock"), with each whole Warrant entitling the Holder to purchase one share of Common Stock (each a "Warrant Share" and collectively the "Warrant Shares") on the terms and subject to the conditions set forth herein. The Warrants have been issued as part of a larger private offering by the Company described in a certain Confidential Offering Memorandum of the Company dated March 21, 1997. 1. TERM. The Warrants may be exercised, in whole or in part, at any time and from time to time from the date hereof until 5:00 Pacific Time on April __, 2000 (the "Exercise Period"). 2. EXERCISE PRICE. The initial exercise price of each whole Warrant shall be $2.66 (the "Exercise Price"). The Exercise Price shall be subject to adjustment as provided in Section 10. 3. EXERCISE OF WARRANTS. The Warrants are exercisable on the terms provided herein at any time during the Exercise Period by the surrender of this certificate to the Company at its principal office together with the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder, accompanied by payment in full, in immediately available funds, of the amount of the aggregate Exercise Price of the Warrant Shares being purchased upon such exercise. The Holder shall be deemed the record owner of such Warrant Shares as of and from the close of business on the date on which this certificate is surrendered together with the completed Notice of Exercise and payment in full as required above (the "Exercise Date"). The Company agrees that the Warrant Shares so purchased shall be issued as soon as practicable thereafter. It shall be a condition to the exercise of the Warrants that the 1 2 Holder or any transferee hereof provide an opinion of counsel reasonably satisfactory to the Company that the Warrants and the Warrant Shares to be delivered upon exercise thereof have been registered under the Securities Act or that an exemption from the registration requirements of the Securities Act is available. 4. FRACTIONAL INTEREST. In lieu of issuing fractional shares of Common Stock upon exercise of the Warrants, the Company may pay the Holder a cash amount determined by multiplying the fraction of a share otherwise issuable by the Fair Market Value of one share of Common Stock. For this purpose, "Fair Market Value" means the average closing sale price for the ten trading days immediately preceding the Exercise Date or, if there is no last-sale reporting for the Common Stock at such time, then the value as determined in good faith by the Board of Directors of the Company. 5. WARRANTS CONFER NO RIGHTS OF STOCKHOLDER. The Holder shall not have any rights as a stockholder of the Company with regard to the Warrant Shares prior to the Exercise Date for any actual purchase of Warrant Shares. 6. INVESTMENT REPRESENTATION. Neither the Warrants nor the Warrant Shares issuable upon the exercise of the Warrants have been registered under the Securities Act or any state securities laws. The Holder acknowledges by acceptance of this certificate that, as of the date of this Warrant and at the time of exercise, (a) the Holder has acquired the Warrants or the Warrant Shares, as the case may be, for investment and not with a view to distribution; and either (b) the Holder has a pre-existing personal or business relationship with the Company or its executive officers, or by reason of the Holder's business or financial experience the Holder has the capacity to protect the Holder's own interests in connection with the transaction; and (c) the Holder and its members are each accredited investors as that term is defined in Rule 501(a) of Regulation D under the Securities Act. The Holder agrees, by acceptance of this certificate, that any Warrant Shares purchased upon exercise of the Warrants may have to be held indefinitely, until registered and qualified for resale pursuant to Section 7, or until an exemption from registration is available, as evidenced by an opinion of counsel reasonably satisfactory to the Company. The Holder, by acceptance of this certificate, consents to the placement of a restrictive legend (the "Legend") on the certificates representing any Warrant Shares that are purchased upon exercise of the Warrants during the applicable restricted period under Rule 144 or any other applicable restricted period under the Securities Act. The Legend shall be in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH 2 3 SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, UNLESS IN THE WRITTEN LEGAL OPINION (APPROVED BY THE COMPANY) OF COUNSEL SATISFACTORY TO THE COMPANY, SUCH REGISTRATION IS NOT REQUIRED. 7. REGISTRATION RIGHTS. The Company agrees, on the following terms and subject to the following conditions, to register under the Securities Act the resale of all Warrant Shares which are purchasable upon the exercise of the Warrants (the "Registrable Securities"), at the Company's own expense, with the exception of any legal and advisory fees or expenses incurred by the Holder in connection with the registration. 7.1 FILING OF REGISTRATION STATEMENT. The Company shall prepare and file with the United States Securities and Exchange Commission ("SEC") not later than 60 days after the date hereof a registration statement on an appropriate form (the "Registration Statement") for registration under the Securities Act of the resale of the Registrable Securities. 7.2 INFORMATION. In connection with the preparation of the Registration Statement: (1) The Holder shall furnish to the Company all information reasonably requested by the Company (including, for example, information regarding the Holder's intended method of disposition of the Registrable Securities) for inclusion in the Registration Statement and response to the SEC comments and questions. (2) As the Holder may be deemed a statutory underwriter of any Registrable Securities sold by the Holder under the Registration Statement, the Company shall give the Holder and its legal counsel and accountants such access to copies of the Company's records and documents and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be reasonably necessary, in the opinion of the Holder or its legal counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 7.3 EFFECTIVENESS OF REGISTRATION STATEMENT. The Company shall use its best efforts to cause the Registration Statement to become effective within 150 days after the date hereof (but if not effective within such period, the Company shall continue to use its best efforts to cause the Registration Statement to become effective as soon as possible thereafter) and 3 4 to keep the Registration Statement effective thereafter until the earlier of (i) the date on which all Registrable Securities have been resold pursuant to the Registration Statement or otherwise resold without restriction under the Securities Act, or (ii) the date on which is ended the two-year period referenced in Rule 144(k) under the Securities Act or any successor rule or subsection relating to the resale of "restricted securities" by "non-affiliates" of an issuer, as such terms are defined in the Securities Act and the rules and regulations promulgated thereunder. 7.4 AMENDMENT AND SUPPLEMENTS. The Company shall prepare and file with the SEC such amendments and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of the Registrable Securities. 7.5 COPIES OF PROSPECTUSES. The Company shall furnish to the Holder of such numbers of copies of prospectuses or prospectus documents conforming with the requirements of the Securities Act as the Holder may reasonably request in order to facilitate the disposition of Registrable Securities owned by the Holder. 7.6 BLUE SKY REGULATIONS. The Company shall use its best efforts to register and qualify the Registrable Securities under the state securities or Blue Sky laws ("State Laws") of such jurisdictions as the Holder reasonably requests. 7.7 QUIET PERIODS. The Holder agrees that, upon its receipt of any notice from the Company of the happening of any event which makes any statement made in the Registration Statement, the prospectus or any documents incorporated therein by reference, untrue in any material respect or which requires the making of any changes in the Registration Statement, the prospectus or any document incorporated therein by reference, in order to make the statements therein not misleading in any material respect, the Holder will forthwith discontinue disposition of Registrable Securities under the prospectus related to the Registration Statement until the Company provides the Holder with copies of the supplemented or amended prospectus or prospectus documents, or until the Holder is advised in writing by the Company that the use of the prospectus may be resumed. The Company agrees to provide the Holder with such copies of the supplemented or amended prospectus or prospectus documents, or notice that use of the prospectus may be resumed, as soon as reasonably practicable. 7.8 TRADING MARKET. The Company covenants to use its best efforts to maintain a continuous trading market for its Common Stock on the Nasdaq SmallCap Market or National Market System or a 4 5 United States national securities exchange throughout the period that the registration rights afforded by this Section 7 remain in effect. 7.9 COMPLIANCE WITH ANTI-MANIPULATION RULES. The Holder agrees that, with respect to the offering for resale of the Registrable Securities, the Holder will comply with Regulation M promulgated under the Exchange Act and such other or additional anti-manipulation rules then in effect (the "Anti-Manipulation Rules") until such offering has been completed. The Company also agrees to comply with the Anti-Manipulation Rules with respect to the offering for resale of the Registrable Securities until such offering has been completed. 7.10 INDEMNIFICATION. To the extent permitted by law, the Company agrees to indemnify and hold harmless the Holder and its affiliates and agents, and the Holder agrees to indemnify and hold harmless the Company and its affiliates and agents: (1) against any losses, claims, damages and liabilities and any legal or other costs and expenses reasonably incurred by such indemnified parties in connection with investigating or defending any such loss, claim, damage liability, or action to which such parties may become subject under the Securities Act or other federal or state law, insofar as such losses, claims, damages, liabilities, costs or expenses (or actions in respect thereof) did not arise out of and were not based upon written information furnished by such parties expressly for use in the Registration Statement; and (2) for amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected by the indemnifying party without the prior written consent of the other party to this Warrant, which consent shall not be unreasonably withheld. 7.11 ENFORCEMENT. In the event of a material breach of the terms of this Section 7 by the Company, the Holder will be entitled to enforce its rights under this Section 7 specifically (without posting a bond or other security), to recover damages by reason of any breach of any provision hereof, and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach by the Company of the provisions hereof, and that the Subscriber may in its sole discretion apply to a court of competent jurisdiction for specific performance and/or injunctive relief in order to enforce or prevent any violation of the provisions hereof. In addition, upon the occurrence of a material breach by the Company or by the Holder of this Section 7, the breaching party shall pay all costs and expenses (including the prevailing party's 5 6 attorney's fees and expenses) reasonably incurred in connection with the preservation and enforcement of such party's rights hereunder. 7.12 SUBSEQUENT HOLDERS. Any person who acquires the Warrants or Warrant Shares in a transaction that does not result in such person receiving securities which are free of restrictions on transfer in the United States and to U.S. Persons, such person shall be entitled to the benefit of all of the rights and privileges set forth in this Section 7, provided that such person agrees in a writing to the Company to undertake all of the obligations of the Holder under this Section 7. 8. RESERVATION OF SHARES. The Company agrees that, at all times during the Exercise Period, the Company will have authorized and reserved, for the exclusive purpose of issuance and delivery upon exercise of the Warrants, a sufficient number of shares of its Common Stock to provide for the issuance of the Warrant Shares. 9. ADJUSTMENT FOR CHANGES IN CAPITAL STOCK. If the Company at any time during the Exercise Period shall, by subdivision, combination or reclassification of securities, change any of the securities into which the Warrants are exercisable into the same or a different number of securities of any class or classes, the Warrants shall thereafter entitle the Holder to acquire such number and kind of securities as would have been issuable as a result of such change with respect to the Warrant Shares if the Warrant Shares had been outstanding immediately prior to such subdivision, combination, or reclassification. If shares of the Company's Common Stock are subdivided into a greater number of shares of Common Stock, the Exercise Price for the Warrant Shares upon exercise of the Warrants shall be proportionately reduced and the number of Warrant Shares shall be proportionately increased; and conversely, if shares of the Company's Common Stock are combined into a smaller number of shares of Common Stock, the Exercise Price shall be proportionately increased, and the number of Warrant Shares shall be proportionately decreased. 10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF CERTIFICATE. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any certificate representing the Warrants or the Warrant Shares (referred to herein as the "original certificate"), and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to the Company, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the original certificate if mutilated, the Company will make and deliver a new certificate of like tenor in lieu of the original certificate. 6 7 11. ASSIGNMENT. The Warrants may be transferred subject to the provisions of Section 6. 12. GENERAL. This certificate shall be governed by and construed in accordance with the laws of the State of California applicable to contracts between California residents entered into and to be performed entirely within the State of California. The headings herein are for purposes of convenience and reference only and shall not be used to construe or interpret the terms of this certificate. The terms of this certificate may be amended, waived, discharged or terminated only by a written instrument signed by both the Company and the Holder. All notices and other communications from the Company to the Holder shall be mailed by first-class registered or certified mail, postage pre-paid, to the address furnished to the Company in writing by the last Holder who shall have furnished an address to the Company in writing. Dated: April , 1997 MICROTEL INTERNATIONAL, INC. By: /s/ Carmine T. Oliva ------------------------------------ (Authorized Signature) President and CEO ------------------------------------ (Name and Title) 7 8 NOTICE OF EXERCISE To: MicroTel International, Inc. (the "Company") 1. The undersigned hereby elects to exercise a total of ______________ Warrants for the purchase of a like number of Warrant Shares, and tenders herewith payment of the Exercise Price for such shares in full. 2. In exercising the Warrants, the undersigned hereby confirms and acknowledges that the Warrant Shares are being acquired solely for the account of the undersigned for investment, and that the undersigned will not offer, sell or otherwise dispose of any of the Warrant Shares unless the Warrant Shares have been registered under the Securities Act or an exemption from such registration is available, as evidenced by an opinion of counsel reasonably satisfactory to the Company. 3. The undersigned hereby certifies that the undersigned has delivered to the Company an opinion of counsel to the effect that the Warrants and the Warrant Shares have been registered under the Securities Act or an exemption form such registration is available. 4. Please issue a certificate representing the Warrant Shares in the name of the Holder and deliver the certificate to the address set forth below. 5. Please issue a new certificate representing the unexercised portion (if any) of the Warrants in the name of the Holder and deliver the certificate to the address set forth below. Dated: __________________ ______________________________________ (Name of Holder) ______________________________________ (Authorized Signature) Address for Delivery: ______________________________________ ______________________________________ ______________________________________ ______________________________________ 8 EX-10.13 5 FORM OF WARRANT TO PURCHASE COMMON STOCK 1 EXHIBIT 10.13 THE WARRANTS REPRESENTED BY THIS CERTIFICATE ("WARRANTS") AND THE UNDERLYING WARRANT SHARES ("WARRANT SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE WARRANTS MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON, THE WARRANTS AND WARRANT SHARES MAY NOT BE OFFERED OR SOLD TO ANY U.S. PERSON, THE WARRANTS MAY NOT BE EXERCISED IN THE UNITED STATES (EXCEPT AS PERMITTED BY REGULATION S), AND THE WARRANT SHARES MAY NOT BE DELIVERED IN THE UNITED STATES, UNLESS, IN EACH CASE, THE WARRANTS AND WARRANT SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE, AS EVIDENCED BY AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY. THE WARRANTS REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED, SOLD, PLEDGED, HYPOTHECATED OR ENCUMBERED EXCEPT UNDER THE LAWS OF DESCENT AND DISTRIBUTION OR BY OPERATION OF LAW. WARRANTS TO PURCHASE COMMON STOCK MICROTEL INTERNATIONAL, INC., a Delaware corporation (the "Company") hereby grants to __________________________________________ (the "Holder") _____________________ (____) non-transferable warrants (the "Warrants") for the purchase of common stock of the Company (the "Common Stock"), with each whole Warrant entitling the Holder to purchase one share of Common Stock (each a "Warrant Share" and collectively the "Warrant Shares") on the terms and subject to the conditions set forth herein. The Warrants have been issued pursuant to a Subscription Agreement dated for reference purposes as of March 21, 1997 entered into between the Holder and the Company (the "Subscription Agreement") and as part of a larger private offering by the Company described in that certain Confidential Offering Memorandum of the Company dated March 21, 1997. 1. TERM. The Warrants may be exercised, in whole or in part, at any time and from time to time from the date hereof until 5:00 Pacific Time on April __, 2000 (the "Exercise Period"). 2. EXERCISE PRICE. The initial exercise price of each whole Warrant shall be $3.45 (the "Exercise Price"). The Exercise Price shall be subject to adjustment as provided in Section 10. 3. EXERCISE OF WARRANTS. The Warrants are exercisable on the terms provided herein at any time during the Exercise Period by the surrender of this certificate to the Company at its principal office together with the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder, accompanied by payment in full, in immediately available funds, of the amount of the aggregate Exercise Price of the Warrant Shares being purchased upon such exercise. The Holder shall be deemed the record owner of such Warrant Shares as of and from the close of business on the date on which this certificate is surrendered together with the completed Notice of Exercise and payment in full as required above (the "Exercise Date"). The Company agrees that the Warrant Shares so purchased shall be issued as soon as practicable 1 2 thereafter. It shall be a condition to the exercise of the Warrants that the Holder or any transferee hereof certify to the Company, at the time of exercise, either that the Holder is not a U.S. person (as defined in Regulation S under the Securities Act of 1933, as amended (the "Securities Act")) and that the Warrants are not being exercised on behalf of a U.S. person, or to provide an opinion of counsel reasonably satisfactory to the Company that the Warrants and the Warrant Shares to be delivered upon exercise thereof have been registered under the Securities Act or that an exemption from the registration requirements of the Securities Act is available. It shall be a further condition to the exercise of the Warrants that the Warrants may not be exercised in the United States and the Warrant Shares may not be delivered in the United States absent registration under the Securities Act or an available exemption from registration, unless otherwise permitted by Regulation S. 4. FRACTIONAL INTEREST. In lieu of issuing fractional shares of Common Stock upon exercise of the Warrants, the Company may pay the Holder a cash amount determined by multiplying the fraction of a share otherwise issuable by the Fair Market Value of one share of Common Stock. For this purpose, "Fair Market Value" means the average closing sale price for the ten trading days immediately preceding the Exercise Date or, if there is no last-sale reporting for the Common Stock at such time, then the value as determined in good faith by the Board of Directors of the Company. 5. WARRANTS CONFER NO RIGHTS OF STOCKHOLDER. The Holder shall not have any rights as a stockholder of the Company with regard to the Warrant Shares prior to the Exercise Date for any actual purchase of Warrant Shares. 6. REDEMPTION. The Warrants may be redeemed by the Company at any time for cash at the price of $.05 per Warrant, provided that (i) the Warrant Shares have been registered for resale pursuant to the Securities Act, (ii) written notice of the redemption (the "Redemption Notice") is delivered by the Company to the Holder not less than 30 days prior to the date of redemption (the "Redemption Date"), and (iii) the last sale price of the Common Stock on the Nasdaq SmallCap Market or National Market System, or on a national securities exchange in the United States, for ten consecutive trading days is equal to or exceeds 150% of the Exercise Price of the Warrants (as adjusted). Following delivery of the Redemption Notice, the Holder may continue to exercise the Warrants in whole or in part on the terms provided herein until the last business day prior to the Redemption Date. 7. INVESTMENT REPRESENTATION. Neither the Warrants nor the Warrant Shares issuable upon the exercise of the Warrants have been registered under the Securities Act or any state securities laws. The Holder acknowledges by acceptance of this certificate that, as of the date of this Warrant and at the time of exercise, (a) the Holder has acquired the Warrants or the Warrant Shares, as the case may be, for investment and not with a view to distribution; and either (b) the Holder has a pre-existing personal or business relationship with the Company or its executive officers, or by reason of the Holder's business or financial experience the Holder has the capacity to protect the Holder's own interests in connection with the transaction; and (c) the Holder is an accredited investor as that term is defined in Rule 501(a) of Regulation D under the Securities Act. The Holder agrees, by acceptance of this certificate, that any Warrant Shares purchased upon exercise of the Warrants may have to be held indefinitely, until registered and qualified for resale pursuant to Section 8, or until an exemption from registration is available, as 2 3 evidenced by an opinion of counsel reasonably satisfactory to the Company. The Holder, by acceptance of this certificate, consents to the placement of a restrictive legend (the "Legend") on the certificates representing any Warrant Shares that are purchased upon exercise of the Warrants during the applicable restricted period under Regulation S or any other applicable restricted period under the Securities Act. The Legend shall be in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS ("STATE LAWS") OR ANY SECURITIES LAWS OF JURISDICTIONS OUTSIDE OF THE UNITED STATES, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE UNITED STATES OR TO A "U.S. PERSON," AS THAT TERM IS DEFINED IN REGULATION S UNDER THE SECURITIES ACT, EXCEPT (1) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT COVERING THE SECURITIES, OR (2) UPON DELIVERY TO THE COMPANY OF AN OPINION OF U.S. COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THE SECURITIES MAY BE TRANSFERRED WITHOUT REGISTRATION PURSUANT TO (A) RULE 144, RULE 144A, OR RULE 904 OF REGULATION S PROMULGATED UNDER THE SECURITIES ACT OR (B) ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT. 8. REGISTRATION RIGHTS. The Warrant Shares which are purchasable upon exercise of the Warrants are entitled to the registration rights which are set forth in Section 9 of the Subscription Agreement. 9. RESERVATION OF SHARES. The Company agrees that, at all times during the Exercise Period, the Company will have authorized and reserved, for the exclusive purpose of issuance and delivery upon exercise of the Warrants, a sufficient number of shares of its Common Stock to provide for the issuance of the Warrant Shares. 10. ADJUSTMENT FOR CHANGES IN CAPITAL STOCK. If the Company at any time during the Exercise Period shall, by subdivision, combination or reclassification of securities, change any of the securities into which the Warrants are exercisable into the same or a different number of securities of any class or classes, the Warrants shall thereafter entitle the Holder to acquire such number and kind of securities as would have been issuable as a result of such change with respect to the Warrant Shares if the Warrant Shares had been outstanding immediately prior to such subdivision, combination, or reclassification. If shares of the Company's Common Stock are subdivided into a greater number of shares of Common Stock, the Exercise Price for the Warrant Shares upon exercise of the Warrants shall be proportionately reduced and the number of Warrant Shares shall be proportionately increased; and conversely, if shares of the Company's Common Stock are combined into a smaller number of shares of Common Stock, the Exercise Price shall be proportionately increased, and the number of Warrant Shares shall be proportionately decreased. 11. LOSS, THEFT, DESTRUCTION OR MUTILATION OF CERTIFICATE. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any certificate representing the Warrants or the Warrant Shares (referred to herein as the "original 3 4 certificate"), and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to the Company, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the original certificate if mutilated, the Company will make and deliver a new certificate of like tenor in lieu of the original certificate. 12. ASSIGNMENT. The Warrants may not be transferred, sold, pledged, hypothecated or encumbered except under the laws of descent and distribution or by operation of law. The Warrants may not be exercised by or on behalf of any U.S. person, the Warrants and Warrant Shares may not be offered or sold to any U.S. person, the Warrants may not be exercised in the United States (except as permitted by Regulation S), and the Warrant Shares may not be delivered in the United States, unless, in each case, the Warrants and Warrant Shares have been registered under the Securities Act or an exemption from such registration is available, as evidenced by an opinion of counsel reasonably satisfactory to the Company. 13. GENERAL. This certificate shall be governed by and construed in accordance with the laws of the State of California applicable to contracts between California residents entered into and to be performed entirely within the State of California. The headings herein are for purposes of convenience and reference only and shall not be used to construe or interpret the terms of this certificate. The terms of this certificate may be amended, waived, discharged or terminated only by a written instrument signed by both the Company and the Holder. All notices and other communications from the Company to the Holder shall be mailed by first-class registered or certified mail, postage pre-paid, to the address furnished to the Company in writing by the last Holder who shall have furnished an address to the Company in writing. Dated: April __, 1997 MICROTEL INTERNATIONAL, INC. By: /s/ Carmine T. Oliva __________________________________________ (Authorized Signature) President and CEO __________________________________________ (Name and Title) 4 5 NOTICE OF EXERCISE To: MicroTel International, Inc. (the "Company") 1. The undersigned hereby elects to exercise a total of ___________ Warrants for the purchase of a like number of Warrant Shares, and tenders herewith payment of the Exercise Price for such shares in full. 2. In exercising the Warrants, the undersigned hereby confirms and acknowledges that the Warrant Shares are being acquired solely for the account of the undersigned for investment, and that the undersigned will not offer, sell or otherwise dispose of any of the Warrant Shares unless the Warrant Shares have been registered under the Securities Act or an exemption from such registration is available, as evidenced by an opinion of counsel reasonably satisfactory to the Company. 3. The undersigned hereby certifies that either (i) the undersigned is not a U.S. person (as such term is defined in Regulation S under the Securities Act), or (ii) the undersigned has delivered to the Company an opinion of counsel to the effect that the Warrants and the Warrant Shares have been registered under the Securities Act or an exemption from such registration is available. 4. The undersigned further certifies that the Warrants are not being exercised in the United States and understands and agrees that the Warrant Shares may not be delivered in the United States, except as permitted by Regulation S, absent registration under the Securities Act or an available exemption from such registration. 5. Please issue a certificate representing the Warrant Shares in the name of the Holder and deliver the certificate to the address set forth below. 6. Please issue a new certificate representing the unexercised portion (if any) of the Warrants in the name of the Holder and deliver the certificate to the address set forth below. Dated: _____________________ ____________________________________________ (Name of Holder) ____________________________________________ (Authorized Signature) Address for Delivery: ____________________________________________ ____________________________________________ ____________________________________________ ____________________________________________ 5 EX-10.16 6 AGENCY AGREEMENT 1 Exhibit 10.16 AGENCY AGREEMENT THIS AGENCY AGREEMENT is dated for purposes of reference as of March 21, 1997, and is entered into between MICROTEL INTERNATIONAL, INC., a Delaware corporation (the "Issuer"), on the one hand, and YORKTON SECURITIES INC., an Ontario corporation (the "Agent"), on the other hand, with respect to the following facts: A. The Issuer proposes to make a private placement (the "Private Placement") of units ("Units"), each comprised of one share (individually, a "Share," and collectively, the "Shares") of the Issuer's common stock, par value of 1/3 cent per share ("Common Stock"), and one-quarter of a detachable non-transferable redeemable Common Stock purchase warrant (each whole warrant, individually, a "Warrant," and collectively, the "Warrants"). The Issuer desires to raise minimum gross proceeds of $5,000,000 and maximum gross proceeds of $10,000,000 through the Private Placement. All dollar amounts set forth in this Agreement are denominated in U.S. dollars. The Units, Shares, Warrants and Warrant Shares are sometimes collectively referred to in this Agreement as the "Securities." B. On the terms and subject to the conditions of this Agreement, the Issuer wishes to appoint the Agent to act as its exclusive agent for purposes of placing the Units in the Private Placement and the Agent is willing to accept such appointment. In consideration of the mutual promises contained in this Agreement, the parties agree as follows: 1. Appointment of Agent. -------------------- 1.1 On the terms and subject to the conditions of this Agreement, the Issuer appoints the Agent as its exclusive agent for purposes of placing the Units in the Private Placement, and the Agent accepts the appointment and agrees to use its best efforts to find and introduce to the Issuer potential investors to purchase the Units. For control purposes, all subscribers in the Private Placement (the "Subscribers") shall be deemed the Agent's clients. 1.2 The Agent may associate with other qualified securities dealers and may allow members of any such selling group such part of Agent's commission, fees or expense reimbursement as Agent may determine; provided, however, that each selling group member must agree in writing to comply with the requirements of Regulation S in connection with the Private Placement. 1.3 The Private Placement shall be made on the terms and subject to the conditions stated in this Agreement and in the subscription agreements between the Issuer and each of the Subscribers (the "Subscription Agreements"), each of which is dated for reference purposes March 21, 1997. 2. Terms of the Private Placement. ------------------------------ 2.1 The Agent shall use its best efforts to raise for the benefit of the Issuer, pursuant to the Private Placement, minimum gross proceeds of $5,000,000 ("Minimum Proceeds") and 1 2 maximum gross proceeds of $10,000,000 ("Maximum Proceeds"). The closing of the Private Placement (the "Closing") shall be governed by the terms of Section 8 of this Agreement. As provided in Section 8, there may be more than one Closing of the Private Placement. The Private Placement will terminate on the earlier of (i) the date on which the Maximum Proceeds are received by the Issuer, and (ii) April 18, 1997, unless extended by the mutual agreement of the Issuer and the Placement Agent (such date, as same may be extended, is referred to herein as the "Termination Date"). In the event that the Issuer does not receive the Minimum Proceeds by the Termination Date, the Private Placement will be terminated and all subscription funds will be returned by the Agent to the Subscribers without interest thereon or deduction therefrom. 2.2 The price per Unit issued in the Private Placement (the "Price Per Unit") shall, for purposes of the First Closing, be $2.50, and shall, for purposes of the Second Closing, be equated to 80% of the average closing bid price of the Issuer's Common Stock as reported by the Nasdaq SmallCap Market for the 10 trading days immediately preceding the date (the "Contract Date") on which the Agent contracts with the Subscribers to purchase the Units (the "Average Reported Price"), provided, however, that in no event will the Price Per Unit for purposes of the Second Closing be less than $2.50 nor more than $3.50. The Agent shall notify the Issuer of the Contract Date for each Closing and shall confirm with the Issuer the proper calculation of the Price Per Unit as provided in the previous sentence. 2.3 The number of Units issuable to each Subscriber shall be determined by dividing the total purchase price paid by such Subscriber by the applicable Price Per Unit. No fractional Units shall be issued in the Private Placement. Any fractional Units shall be rounded down to the nearest whole Unit. 2.4 Each whole Warrant will entitle the holder to purchase one additional share of Common Stock (individually, a "Warrant Share," and collectively, the "Warrant Shares") at an exercise price ("Exercise Price") which, for purposes of the First Closing, shall be $3.45 and, for purposes of the Second Closing, shall be equated to a 30% premium to the Average Reported Price, subject to adjustments as provided in the form of the Warrants attached to the Issuer's Confidential Private Offering Memorandum dated March 21, 1997 (the "Offering Memorandum"). The Warrants will be exercisable until 5:00 p.m. Pacific time on the date of the third anniversary of the First Closing of the Private Placement. The Warrants will be redeemable by the Issuer at a price of $.05 per Warrant, provided that (i) the Warrant Shares have been registered for resale pursuant to the Securities Act, (ii) written notice of the redemption (the "Redemption Notice") is delivered by the Issuer to the holders not less than 30 days prior to the date of redemption (the "Redemption Date"), and (iii) the last sale price of the Common Stock on the Nasdaq SmallCap Market or National Market System, or on a national securities exchange in the United States, for ten consecutive trading days is equal to or exceeds 150% of the Exercise Price of the Warrants (as adjusted). Following delivery of the Redemption Notice, the holders may continue to exercise the Warrants in whole or in part until the last business day prior to the Redemption Date. 2.5 Each of the Securities will be issued with a restrictive legend substantially as provided in the form of the Subscription Agreement and the form of the Warrants attached as exhibits to the Offering Memorandum. 2 3 2.6 The Issuer will grant to Subscribers the registration rights set forth in Section 9 of the Subscription Agreements. 2.7 The Agent shall obtain from each Subscriber a fully completed and executed Subscription Agreement, together with payment in full for the Units subscribed for thereunder. 3. Representations and Warranties of the Issuer. -------------------------------------------- The Issuer hereby represents and warrants as of the date of this Agreement and at each Closing (with the understanding that the Agent will be relying upon such representations and warranties in entering into this Agreement) that, except as otherwise disclosed in the Offering Documents (as such term is defined in Section 7.2 of the Subscription Agreements) or in Schedule A attached hereto: 3.1 Organization. The Issuer has been duly incorporated and is validly existing in good standing as a corporation under the laws of the State of Delaware. On March 26, 1997, XIT Acquisition Inc., a wholly-owned subsidiary of the Issuer ("Sub"), merged with and into XIT Corporation (the "Merger"), whereby XIT Corporation became a wholly-owned subsidiary of the Issuer and XIT Corporation's subsidiaries became indirectly owned subsidiaries of the Issuer. All of the Issuer's subsidiaries (which term, as used in this Agreement, includes both wholly-owned and indirectly-owned subsidiaries) have been duly organized and are validly existing in good standing under the laws of the respective jurisdictions in which they have been organized. 3.2 Good Standing. The Issuer and its subsidiaries are duly qualified to do business as foreign corporations in good standing in those jurisdictions which require such qualification except to the extent that failure to so qualify would not have a material adverse effect on the Issuer's business, financial condition or results of operations. 3.3 Authority. The Issuer has corporate power and authority to enter into this Agreement and perform its obligations hereunder, and the Issuer and its subsidiaries have corporate power and authority to own their respective properties and assets and to carry on their respective businesses as described in the Offering Documents. All corporate action on the part of the Issuer, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement by the Issuer and the performance of all of the Issuer's obligations hereunder has been duly taken. 3.4 Enforceability. This Agreement and the Subscription Agreements, when executed and delivered by the Issuer, will, if duly authorized, executed and delivered by the other respective parties to such agreements, be valid and binding obligations of the Issuer, enforceable against the Issuer in accordance with their terms, except to the extent that rights to indemnity and contribution thereunder may be limited by federal or state securities laws or the public policy underlying such laws and except as the foregoing may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws affecting the rights of creditors generally and by general principles of equity. The Warrants and the Agent's Warrants (as defined in Section 9.5) will, when executed and delivered by the Issuer, be binding obligations of the Issuer, enforceable against the Issuer in accordance with their terms, except as the foregoing may be limited by 3 4 bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws affecting the rights of creditors generally and by general principles of equity. 3.5 No Violation. The execution and delivery of this Agreement and the consummation of the transactions or performance of the obligations contemplated by this Agreement do not and will not result in a breach of any term of, or constitute a default under, the Issuer's charter or bylaws, any statute, any indenture, mortgage, or other agreement or instrument to which the Issuer or any of its subsidiaries is or are a party or by which any of them is or are bound, or any order, writ, judgment or decree. 3.6 Actions and Claims. To the best of the Issuer's knowledge, there are no actions or proceedings of any kind whatsoever outstanding, pending, contemplated or threatened relating to the bankruptcy or insolvency of the Issuer or any of its subsidiaries. To the best of its knowledge, there are no other claims, actions, suits, judgments, investigations or proceedings of any kind whatsoever outstanding, pending or threatened against or affecting the Issuer, its subsidiaries, or the directors, officers or promoters of the Issuer or its subsidiaries, at law or in equity or before or by any federal, state, municipal or other governmental department, commission, board, bureau or agency of any kind whatsoever which could materially affect its business or financial condition and, to the best of its knowledge, there is no basis therefor. 3.7 Disclosure. The Offering Documents do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they have been made, not misleading. 3.8 Authorized and Validly Issued Securities. The issued and outstanding capital stock of the Issuer as of the dates set forth in the Offering Documents is as disclosed in the Offering Documents, and the issued and outstanding shares of Common Stock of the Issuer are fully paid and non-assessable. The Issuer has sufficient authorized and unissued shares of Common Stock to provide for the issuance and delivery of the Shares, the Warrant Shares and the Agent's Warrant Shares. The Issuer's authorized capital stock includes 25,000,000 shares of Common Stock with a par value of 1/3 cent per share and 10,000,000 shares of Preferred Stock with a par value of $.01 per share. The Shares, when issued in the manner contemplated by the provisions of the Subscription Agreements, will be duly authorized and validly issued and will be fully paid and non-assessable. The Warrant Shares, when issued in the manner contemplated by the Warrants, will be duly authorized and validly issued and will be fully paid and non-assessable. The Agent's Warrants Shares (as defined in Section 9.5), when issued in the manner contemplated by the Agent's Warrants, will be duly authorized and validly issued and will be fully paid and non-assessable. 3.9 Convertible Securities. Other than (i) the Warrants which are issuable under the Subscription Agreements, (ii) the Agent's Warrants which are issuable under this Agreement, and (iii) an aggregate of 330,368 stock options awarded to Barry Reifler and Henry Mourad in connection with the continuation of their employment with the Issuer following the Merger, no securities convertible or exchangeable into Common Stock of the Issuer or agreements, warrants, options, rights or privileges for the purchase or other acquisition of any unissued securities of the Issuer are outstanding. 4 5 3.10 Intellectual Property Rights. The Issuer or its subsidiaries own, possess or have access to adequate rights to use all material patents, patent rights, inventions, trademarks, service marks, trade names, copyrights and proprietary rights necessary for the conduct of their businesses as described in the Offering Documents; and the Issuer has no knowledge of any infringement of or conflict with rights of others, or any claims thereof, with respect to any patents, patent rights, inventions, trademarks, service marks, trade names, copyrights or other proprietary rights, the effect of which infringement, conflict or claims would be materially adverse to the Issuer. 3.11 Financial Statements. The financial statements included in the Offering Documents (the "Financial Statements") are true and correct in all material respects and present fairly and accurately the financial position and results of the operations of the Issuer and its subsidiaries and of XIT Corporation and its subsidiaries for the periods shown therein, and the Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States applied on a consistent basis except for normal year-end adjustments. 3.12 Change in Circumstances. Since September 30, 1996, there has not been any adverse material change of any kind whatsoever in the financial position or condition of the Issuer (or of XIT Corporation prior to the Merger) or of any of the Issuer's subsidiaries, or any damage, loss or other change of circumstances of any kind whatsoever materially affecting the business or assets of the Issuer or of any of its subsidiaries or the right or capacity of the Issuer or of any of its subsidiaries to carry on their businesses. 3.13 Defaults. Since September 30, 1996, neither the Issuer nor any of its subsidiaries has defaulted, or is currently in default (i) with respect to the payment of interest or principal on any material indebtedness of the Issuer or its subsidiaries, or (ii) under any material contract to which the Issuer or any of its subsidiaries is a party. 3.14 Stop Orders. No order prohibiting the sale of the Issuer's securities has been issued against the Issuer or, to Issuer's knowledge, its directors, officers or promoters, and no proceedings for this purpose have been instituted, are pending, or, to its knowledge, are contemplated or threatened. 3.15 Transfer Agent. American Securities Transfer, Inc., having its principal office in Lakewood, Colorado, has been duly appointed as the transfer agent for the Issuer's Common Stock. 3.16 Reporting Company. The Issuer has a class of securities registered pursuant to Section 12(b) or 12(g) of the United States Securities Exchange Act of 1934, as amended (the "Exchange Act") or is required to file reports pursuant to Section 15(d) of the Exchange Act. 3.17 Exchange Act Reports. At the commencement of the Private Placement, the Issuer had filed all the material required to be filed pursuant to Section 13(a) or 15(d) of the Exchange Act for a period of at least the twelve months immediately prior thereto, and the Issuer has since remained, and continues to remain, current in satisfying such filing obligations. 3.18 No Directed Selling Efforts. The Issuer, its affiliates, and persons acting on behalf of the foregoing have not made and will not make any Directed Selling Efforts in the United 5 6 States with respect to the Securities or the Agent's Warrants or Agent's Warrant Shares. For purposes of this Agreement, "Directed Selling Efforts" include any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for the the subject securities, including, but not limited to, the placement of an advertisement in a publication with a general circulation in the United States that refers to the offering of the subject securities, the mailing of promotional materials to persons located in the United States or the holding of promotional meetings or seminars in the United States. 3.19 Compliance with Regulation S. Assuming that the representations and warranties of the Subscribers in their respective Subscription Agreements, and of the Agent in this Agreement, are correct, the offer and sale of the Shares and the Warrants in the Private Placement is not subject to the registration or prospectus delivery requirements of the Securities Act by virtue of compliance with Rule 903 (including Rule 903(c)(2)) of Regulation S promulgated under the Securities Act. Assuming that (A) the representations and warranties of the Subscribers in their respective Subscription Agreements, and of the Agent in this Agreement, are correct, (B) the Warrants are exercised in accordance with all of their terms, and (C) the representations and warranties in the Notice of Exercise attached to the Warrants are true and correct when each Notice of Exercise is signed and delivered to the Issuer, the offer and sale of the Warrant Shares is not subject to the registration or prospectus delivery requirements of the Securities Act by virtue of compliance with Rule 903 (including Rule 903(c)(2)) of Regulation S promulgated under the Securities Act. Assuming that the representations and warranties of the Agent in this Agreement are correct, the offer and sale of the Agent's Warrants is not subject to the registration or prospectus delivery requirements of the Securities Act by virtue of compliance with Rule 903 (including Rule 903(c)(2)) of Regulation S promulgated under the Securities Act. Assuming that (A) the representations and warranties of the Agent in this Agreement are correct, (B) the Agent's Warrants are exercised in accordance with all of their terms, and (C) the representations and warranties in the Notice of Exercise attached to the Agent's Warrants are true and correct when the Notice of Exercise is signed and delivered to the Issuer, the offer and sale of the Agent's Warrant Shares is not subject to the registration or prospectus delivery requirements of the Securities Act by virtue of compliance with Rule 903 (including Rule 903(c)(2)) of Regulation S promulgated under the Securities Act. 3.20 Placement Authorized. The terms of the Private Placement as set forth in the Offering Memorandum, and the form of the Offering Memorandum and exhibits thereto, have been duly authorized by all necessary corporate action on the part of the Issuer. 3.21 Franchises. The Issuer and its subsidiaries hold all franchises, approvals, grants, authorizations, licenses, permits, easements, consents, certificates and orders ("franchises") from all federal, state and other governmental agencies, except to the extent that the failure to have any such franchise or franchises would not have a material adverse effect on the business, properties, financial condition or results of operations of the Issuer and its subsidiaries on a consolidated basis; and the Issuer and its subsidiaries have not received any notice of proceedings relating to the revocation or modification of any franchise or franchises which, singly or in the aggregate, if the subject of any unfavorable decision, ruling or finding, would have a material adverse effect on the business, properties, financial condition or results of operations of the Issuer and its subsidiaries on a consolidated basis. 6 7 3.22 Taxes. The Issuer and its subsidiaries have filed all tax returns required to be filed by them and have paid all taxes shown as due thereon; the Issuer or its subsidiaries have not been notified, either orally or in writing, that any taxing authority is conducting or intends to conduct an audit of any tax return or report filed by the Issuer or its subsidiaries concerning their business or properties; and the Issuer has no knowledge of any tax deficiency which has been asserted or threatened against the Issuer or its subsidiaries; provided, however, that the foregoing representations and warranties exclude matters which are immaterial in respect to, or have had and will have no material adverse effect on the business, properties, financial condition or results of operations of the Issuer and its subsidiaries on a consolidated basis. 3.23 Dividends and Distributions. Except as described below, the Issuer has not, directly or indirectly, declared or paid any dividend or declared or made any other distribution on or of any of its Common Stock or Preferred Stock or other securities of any class, nor does the Issuer currently have any agreement or obligation, whether directly or indirectly, to redeem, purchase or otherwise acquire any such Common Stock, Preferred Stock or other securities of any class. The Issuer entered into an April 18, 1995 agreement with F. Jack Gorry, former President of the Issuer, to issue, register and tender to Mr. Gorry 130,000 shares of the Issuer's Common Stock (the "Gorry Shares"), and subsequently entered into an Agreement of Settlement and Mutual Release dated June 28, 1996 (the "Settlement Agreement"), which provided for the Issuer to pay $1,700 per month to Mr. Gorry until the sooner of December 1, 1996 or the lifting of the restrictions on the Gorry Shares, plus payment of certain attorney's fees. The Settlement Agreement also provided that, if the Gorry Shares have a market value less than $170,000 on the date trading restrictions on the Gorry Shares are lifted, the Issuer will pay Mr. Gorry the difference in value within ten days, and, if the Gorry Shares are not freely transferable by November 30, 1996, the Issuer will pay liquidated damages of $170,000 to Mr. Gorry by December 10, 1996 and Mr. Gorry will surrender to the Issuer the stock certificate representing the Gorry Shares. On November 30, 1996 the parties amended the Settlement Agreement (the "Amendment") to provide for an additional payment to Mr. Gorry of $17,500, continued payments to Mr. Gorry of $1,700 per month until the sooner of July 1, 1997 or the lifting of restrictions on the Gorry Shares, and the payment of certain additional attorney's fees. The Amendment also changed the deadline for lifting of restrictions from November 30, 1996 to June 30, 1997 and the deadline for payment of liquidated damages from December 10, 1996 to July 10, 1997. 3.24 Exclusive Agent; No Finder. Other than the Agent and its agents, there is no person, firm or corporation acting or purporting to act at the request of the Issuer who is entitled to any brokerage or finder's fee in connection with sales of Units to the Agent's clients. 3.25 Labor Relations. To the Issuer's knowledge, labor relations with employees of the Issuer and its subsidiaries are good and no labor disturbance or stoppage by the employees of the Issuer or its subsidiaries exists or is imminent which might be expected to materially and adversely affect the conduct of the business of the Issuer. 3.26 Insurance. The Issuer and its subsidiaries maintain insurance, which is in full force and effect, of the types and in the amounts which the Issuer believes are adequate for its business and in line with insurance maintained by similar companies and businesses, including but not limited to, insuring all personal property owned or leased by the Issuer against theft, damage, destruction, acts of vandalism, public liability and all other risks customarily insured against. 7 8 3.27 No Price Manipulation or Stabilization. Since January 1, 1997, the Issuer has not taken, directly or indirectly, any action designed to constitute or which has constituted or which might reasonably be expected to cause or result in, the stabilization or manipulation of the price of any security issued by the Issuer. 3.28 No Significant Proposed Transactions. The Issuer has not agreed, or agreed in principle, to merge with or acquire any other business, division or unit thereof or to sell the Issuer's business or any significant part of the Issuer's assets otherwise than through transactions occurring in the ordinary course of the Issuer's business. 3.29 Books and Records. The Issuer and its subsidiaries make and keep accurate books and records and maintain internal accounting controls which provide reasonable assurance that (a) transactions are executed in accordance with management's authorization, (b) transactions are recorded as necessary to permit preparation of financial statements and to maintain accountability for assets, (c) access to assets is permitted only in accordance with management's authorization and, (d) reported assets are compared with existing assets at reasonable intervals. 4. Representations and Warranties of Agent. --------------------------------------- The Agent represents and warrants to and for the benefit of the Issuer that: 4.1 The Agent is a corporation duly organized, validly existing and in good standing under the laws of the Province of Ontario. The Agent has the requisite corporate power to carry on its business as presently conducted, and to enter into and carry out the provisions of this Agreement and the transactions contemplated hereby. 4.2 All corporate action on the part of the Agent, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement by the Agent and the performance of all of the Agent's obligations hereunder has been taken. This Agreement, when executed and delivered by the Agent, will, if duly authorized, executed and delivered by the Issuer, be a valid and binding obligation of the Agent, enforceable against the Agent in accordance with its terms, except to the extent that rights to indemnity and contribution hereunder may be limited by federal or state securities laws or the public policy underlying such laws and except as the foregoing may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws affecting the rights of creditors generally and by general principles of equity. 4.3 The execution and delivery of this Agreement and the consummation of the transactions contemplated in this Agreement do not and will not conflict with and do not and will not result in a breach of any of the terms of the Agent's incorporating documents or any agreement or instrument to which the Issuer is a party. 5. Covenants of the Issuer. ----------------------- The Issuer covenants and agrees with the Agent that: 8 9 5.1 The Issuer shall furnish the Agent with copies of the Offering Documents, and all amendments and supplements thereto, in each case as soon as available and in such quantities as the Agent may reasonably request for its use in connection with the Private Placement. 5.2 The Issuer covenants to comply with all applicable requirements of Regulation S under the Securities Act in connection with the Private Placement. 5.3 The Issuer will deliver to the Agent and to its legal counsel at the time of each Closing a certificate (the "Officer's Certificate") addressed to the Agent and dated the Closing Date for such Closing, signed by the Chief Executive Officer or Chief Financial Officer of the Issuer, to the effect that (i) there has not been, since the respective dates as of which information is given in the Offering Documents, any material adverse change (whether financial or otherwise) in the business, affairs, operations, assets, liabilities (contingent or otherwise) or capital of the Issuer on a consolidated basis; (ii) all of the representations and warranties contained in Section 3 hereof are true and correct with the same force and effect as though expressly made at and as of such Closing, after giving effect to the transactions contemplated hereby (and subject to the disclosures made on Schedule A to this Agreement); and (iii) the Issuer has performed and complied in all material respects with all agreements, covenants, terms and conditions required to be performed, complied with and satisfied by it up to the time of such Closing. 5.4 At the time of each Closing, the Issuer will deliver all required Legal Opinions (as defined in Section 8.7) to the Agent and its counsel. 5.5 From and including the date that this Agreement is executed through and including the Closing Date for each Closing, the Issuer will do all such acts and things reasonably necessary to ensure that all of the representations and warranties of the Issuer contained in this Agreement or any Officer's Certificate delivered by the Issuer pursuant to this Agreement remain true and correct. 5.6 From and including the date that this Agreement is executed through and including the Closing Date for each Closing, the Issuer will not do any act or thing that would render any representation or warranty of the Issuer contained in this Agreement or any Officer's Certificate delivered by the Issuer pursuant to this Agreement untrue or incorrect. 5.7 Prior to each Closing, the Issuer will allow the Agent to conduct all due diligence which the Agent may reasonably require. 5.8 At all times during the Exercise Period of the Warrants (as defined in the Warrants), the Issuer shall have authorized and reserved, for the exclusive purpose of issuance and delivery upon exercise of the Warrants, a sufficient number of shares of its Common Stock to provide for the exercise of the Warrants in accordance with their terms. In addition, at all times during the Exercise Period of the Agent's Warrants (as defined in the Agent's Warrants), the Issuer shall have authorized and reserved, for the exclusive purpose of issuance and delivery upon exercise of the Agent's Warrants, a sufficient number of shares of its Common Stock to provide for the exercise of the Agent's Warrants in accordance with their terms. 9 10 5.9 The Issuer will duly and punctually perform all of the obligations to be performed by it under this Agreement, the Subscription Agreements, the Warrants and the Agent's Warrants. 5.10 The Issuer will use its best efforts to maintain the quotation of the Issuer's Common Stock on Nasdaq on either the SmallCap Market or the National Market System, or to obtain and maintain the listing of the Issuer's Common Stock for trading on a United States national securities exchange, as such term is defined in Section 6 of the Exchange Act and rules and regulations promulgated thereunder. 5.11 Prior to or promptly after each Closing, the Issuer will take all actions necessary for the Shares issued in such Closing to be quoted for trading on the Nasdaq SmallCap Market. Promptly after the first exercise of any Warrants or Agent's Warrants issued in the Private Placement, the Issuer will take all actions necessary for all of the Warrant Shares and Agent's Warrant Shares which are issuable as a result of the Private Placement to be quoted for trading on the Nasdaq SmallCap Market or quoted or listed on such other automated quotation system or national securities exchange which, at that time, is the principal market for trading of the Issuer's Common Stock. 5.12 For at least one year after the last Closing of the Private Placement, the Issuer will engage and adequately compensate a public relations firm to disseminate news and other corporate information to the North American stock brokerage community in conformity with applicable laws and regulations. 6. Covenants of the Agent. ---------------------- The Agent covenants and agrees with the Issuer that: 6.1 The Agent will comply with all applicable laws of each jurisdiction in which it offers the Units for sale on behalf of the Issuer; provided, however, that the Issuer shall be solely responsible for making any required filings and obtaining any required permits in respect thereto. 6.2 The Agent will comply with all applicable requirements of Regulation S under the Securities Act in connection with the Private Placement. 6.3 The Agent will duly and punctually perform all of its obligations under this Agreement and the Subscription Agreements. 7. Conditions Precedent. -------------------- The following are conditions precedent to the obligations of the Agent to complete the transactions contemplated in this Agreement: 7.1 All actions required to be taken by or on behalf of the Issuer, including the adopting of all requisite resolutions of directors of the Issuer, will have been taken so as to validly offer, sell, allot, issue and deliver the Units to the Subscribers. 10 11 7.2 No order prohibiting the offer, sale, allotment, issuance or delivery of the Units will have been issued and no proceedings for such purpose, to the knowledge of the Issuer, will be pending or threatened. 7.3 The Issuer will have delivered, at the time of each Closing, all Legal Opinions (as hereinafter defined) and Officer's Certificates required under this Agreement. 7.4 The Issuer will, as of the time of each Closing, have complied with all of its covenants and agreements contained in this Agreement. 7.5 The Agent will have been entirely satisfied with the results of its due diligence investigations. 7.6 Except as otherwise disclosed in writing by the Issuer to the Agent, the representations and warranties of the Issuer contained in this Agreement will, as of the time of each Closing, be true and correct as if such representations and warranties had been made as of the time of such Closing. 8. Closing. ------- 8.1 The first Closing ("First Closing") of the Private Placement may be held only on condition that the Minimum Proceeds have been received by the Agent from the Subscribers and the Merger of XIT Corporation into the Issuer has been completed. The Issuer hereby represents and warrants that, as of the date of execution of this Agreement, the Merger has already been completed. 8.2 Provided that all of the conditions to the First Closing have been satisfied or waived in accordance with the terms of this Agreement and the Subscription Agreements, the First Closing shall take place on April 1, 1997 at 9:00 a.m. (Pacific time) or on such other date or at such other time as the Issuer and the Agent shall mutually agree. If an amount less than the Maximum Proceeds is received by the Issuer in the First Closing, the Issuer and the Agent may agree to hold a second Closing (the "Second Closing") on or before the Termination Date for all or any part of the balance of the Maximum Proceeds not received by the Issuer in the First Closing. The date of each such Closing is referred to in this Agreement as a "Closing Date." Prior to each Closing, all subscription funds received by the Agent will be held by the Agent in trust for the benefit of the Subscribers. 8.3 Each Closing will be held at the offices of the Issuer located at 4290 Brickell Street in Ontario, California, and/or such other place or places as may be mutually acceptable to the Issuer and the Agent. 8.4 Prior to each Closing, the Agent will deliver or cause to be delivered to the Issuer the Subscription Agreements executed by the Subscribers. 8.5 Prior to each Closing, the Issuer will deliver to the Agent or its counsel a certificate of good standing from each jurisdiction where the Issuer and its subsidiaries are incorporated and are qualified or required to be qualified to do business as foreign corporations; 11 12 provided, however, that this obligation shall apply with respect to non-U.S. subsidiaries of the Issuer only to the extent that such certificates (or their legal equivalent) are reasonably available to the Issuer under the circumstances. 8.6 The Issuer will cause the definitive instruments representing the Shares, the Warrants and Agent's Warrants (the "Certificates") to be issued at each Closing to be executed and made available for inspection by the Agent or its counsel prior to such Closing. 8.7 At each Closing, the Issuer shall (i) upon its acceptance of the Subscription Agreements, execute and deliver the Subscription Agreements to the Agent, and (ii) deliver to the Agent the Officer's Certificate described in Section 5.3 and such opinions of the Issuer's legal counsel as the Agent reasonably requires ("Legal Opinions"); following which the Agent will deliver, or cause to be delivered to the Issuer, by wire transfer or account transfer in immediately available funds, an amount equal to the Net Proceeds of the Private Placement (as hereinafter defined) for such Closing. The Issuer will provide the Agent with its wire or account transfer instructions prior to each Closing. 8.8 Upon receipt of confirmation of the wire or account transfer of the Net Proceeds of the Private Placement for each Closing, the Issuer shall deliver the Certificates to the Agent or its counsel, and the Agent shall arrange for the prompt distribution to the Subscribers of the certificates representing the Shares and Warrants. 9. Agent's Fee and Expenses. ------------------------ 9.1 Immediately prior to each Closing and the release of proceeds from the sale of Units to the Issuer, the Issuer and Agent shall identify all Units being sold as to which the Agent is entitled to a fee, with the gross proceeds of the sale of such Units being referred to herein as the "Gross Proceeds of the Private Placement." 9.2 On the Closing Date for each Closing the Issuer will pay to the Agent, in consideration of the services performed by the Agent under this Agreement, a cash fee of seven percent (7%) of the Gross Proceeds of the Private Placement (the "Placement Fee") for such Closing. The Placement Fee shall be in addition to the reimbursement of the Agent's Expenses provided for in Section 9.3 of this Agreement. 9.3 On the Closing Date for each Closing, the Issuer shall reimburse in full all of the Agent's legal and out-of-pocket expenses related to the Private Placement in an amount not to exceed two percent (2%) of the Gross Proceeds of the Private Placement for such Closing, net of any amounts previously advanced by the Issuer to the Agent for such purpose (the "Agent's Expenses"). The Agent shall, as soon as practicable after each Closing, provide the Issuer with an itemized accounting of the Agent's Expenses for such Closing. 9.4 With respect to each Closing, the Gross Proceeds of the Private Placement, less the amount of the Placement Fee and the amount of the Agent's Expenses, shall constitute the "Net Proceeds of the Private Placement" for purposes of this Agreement. 12 13 9.5 On the Closing Date for each Closing, the Issuer shall also grant and deliver to the Agent, as additional consideration hereunder, non-transferable warrants to purchase such number of shares of Common Stock as equals 7% of the number of Shares issued to Subscribers at such Closing (the "Agent's Warrants"). The Agent's Warrants shall be exercisable for a period of three years from such Closing Date at an exercise price equal to the lesser of the Average Reported Price and $3.50. The Agent's Warrants shall be in substantially the same form as that of the Warrants issued to Subscribers at the Closing, including standard anti-dilution adjustments. With respect to the shares of Common Stock purchasable upon exercise of the Agent's Warrants (the "Agent's Warrant Shares"), the Issuer hereby grants to the Agent the same registration rights provided to Subscribers under Section 9 of the Subscription Agreements, and the provisions of Section 9 of the Subscription Agreements (except for Section 9.12) are incorporated herein by this reference (substituting the word "Issuer" for the word "Company" wherever it appears, the word "Agent" for the word "Subscriber" wherever it appears, the words "Agent's Warrants" for the word "Warrants" wherever it appears, and the words "Agent's Warrant Shares" for the word "Shares" wherever it appears). In connection with the offer and sale of the Agent's Warrants and the Agent's Warrant Shares to the Agent, the Agent hereby makes the Subscriber representations and warranties to the Issuer which are set forth in Sections 7.7, 7.8 and 7.9 of the Subscription Agreements (substituting the words "Agent's Warrants and Agent's Warrant Shares" for the word "Units" wherever it appears), all of which provisions (as thus modified) are incorporated herein by this reference. 9.6 The Issuer will pay its own expenses incident to the transactions contemplated by this Agreement. The expenses of the Issuer include, but are not limited to (i) fees and disbursements of counsel for the Issuer; (ii) costs of the preparation, review, printing or photocopying, and delivery of the Offering Documents, Subscription Agreements and each amendment or supplement thereto; and (iii) Issuer's fees and expenses which may be incurred pursuant to the registration rights provisions referred to in Section 9.5 of this Agreement. 10. Indemnification. --------------- 10.1 The Issuer hereby covenants and agrees to protect, indemnify and hold harmless the Agent and its directors, officers, employees, solicitors, attorneys and agents, but specifically excluding any investor in the Private Placement (individually, an "Indemnified Party" and, collectively, the "Indemnified Parties") from and against all losses, claims, costs, expenses, obligations, damages, recoveries, forfeitures or liabilities, including interest, penalties and reasonable attorneys' fees, which they may suffer or incur caused by or arising directly or indirectly by reason of: 10.1.1 any information or statement contained in the Offering Documents or any other representation made by the Issuer to the Agent or to a Subscriber or potential Subscriber in this Agreement or the Subscription Agreements being or being alleged to be a material misrepresentation; 10.1.2 the omission or alleged omission to state in the Offering Documents a material fact required to be stated therein or necessary to prevent any statement made therein from being false or misleading in light of the circumstances under which it was made; 13 14 10.1.3 the Issuer's failure to comply with any requirement of securities laws or regulations of any jurisdiction applicable to the Private Placement; 10.1.4 any order made or any inquiry, investigation (whether formal or informal) or proceeding commenced or threatened by any regulatory authority based upon an allegation that any untrue statement of a material fact or alleged omission or any misrepresentation or alleged misrepresentation of a material fact exists in the Offering Documents or in any public statement or press release by the Issuer which prevents or restricts the trading in or distribution of the Units otherwise permitted; 10.1.5 the Issuer's failure to comply with any of its obligations hereunder, through no fault of the Agent or Indemnified Party, including any material breach of or default under any representation, warranty, covenant or agreement of the Issuer contained in this Agreement or any other document to be delivered pursuant to this Agreement; 10.1.6 any order made by any court or regulatory authority setting aside the sale or issuance of any of the Units, Agent's Warrants, or underlying securities; or 10.1.7 the failure or inability of the Issuer to issue and deliver in satisfactory form the instruments representing Units or Agent's Warrants. Provided, however, that the Issuer will not be liable in any such case to the extent that any such loss, claim, damage, cost, expense, obligation, recovery, forfeiture or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission made in the Offering Documents in reliance upon and in conformity with information furnished to the Issuer by the Agent expressly for use therein; and provided, further that such indemnity shall not inure to the benefit of the Indemnified Parties to the extent that any loss, claim, damage, cost, expense, obligation, recovery, forfeiture or liability results from the fact that the Agent failed to send or give a copy of the Offering Documents to any person at or prior to the confirmation of the sale of the Units to such person or to the extent any Indemnified Party fails to comply with the Securities Act in connection with the sale of the Units. 10.2 If any action or claim shall be asserted against an Indemnified Party in respect of which indemnity may be sought from the Issuer pursuant to the provisions hereof, or if any potential claim contemplated by this Section shall come to the knowledge of an Indemnified Party, the Indemnified Party shall promptly notify the Issuer in writing of the nature of such action or claim (provided that any failure to so notify shall not affect the Issuer's liability under this Section unless such delay has prejudiced the defense of such claim). The Issuer will assume the defense of the action or claim, including the employment of counsel and the payment of all expenses. The Indemnified Parties will have the right to employ separate counsel at the expense of the Issuer in the event of a conflict of interests between the Issuer and such Indemnified Party or Parties; provided, however, that the Indemnified Parties shall not unreasonably delay their exercise of this right. Neither party shall effect any settlement of any such action or claim or make any admission of liability without the written consent of the other party, such consent not to be unreasonably withheld or delayed. The indemnity hereby provided for shall remain in full force and effect and shall not be limited to or affected by any other indemnity in respect of any matters specified in this Agreement obtained by the Indemnified Party from any other person and will continue in full force 14 15 and effect until all possible liability of the Indemnified Parties arising out of the transactions contemplated by this Agreement has been extinguished by the operation of law. 10.3 To the extent that any Indemnified Party is not a party to this Agreement, the Agent shall obtain and hold the right and benefit arising under this Section on their behalf in trust for and on behalf of such Indemnified Party. 10.4 The Issuer hereby consents to personal jurisdiction and service and venue in any court in which any claim which is subject to indemnification hereunder is brought against the Agent or any Indemnified Party and to the assignment of the benefit of this Section to any Indemnified Party for the purpose of enforcement; provided, that nothing herein shall limit the Issuer's right or ability to contest the appropriate jurisdiction or forum for the determination of any such claims. 11. Contribution. ------------ 11.1 In the event that, for any reason, the indemnity provided for in Section 10 hereof is held to be illegal or unenforceable, the Agent and the Issuer shall contribute to the aggregate of all losses, claims, costs, damages, expenses or liabilities of the nature provided for in Section 10, such that the Agent shall be responsible for that portion thereof represented by the percentage that the Placement Fee bears to the Gross Proceeds of the Private Placement, and the Issuer shall be responsible for the balance. 11.2 Notwithstanding Section 11.1, a person who has committed a fraudulent misrepresentation shall not be entitled to contribution from any other party. 11.3 Any party entitled to contribution will, promptly after receiving notice of commencement of any claim, action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party under this Section, notify such party from whom contribution may be sought; provided, however, that the omission of any party to notify such other party or parties shall not relieve the party or parties from whom contribution is sought from any obligation hereunder to the extent such party or parties were not adversely affected by such omission. 11.4 The right to contribution provided in this Section shall be in addition to, and not in derogation of, any other right to contribution which the Agent may have by statute or otherwise by law. 12. Termination of Agent's Obligations. ---------------------------------- 12.1 With respect to each Closing, the Agent may terminate its obligations hereunder and the Subscribers' obligations under the Subscription Agreements, by written notice to the Issuer, in the event that after the date hereof and at or prior to the Closing Date for the such Closing: 12.1.1 any order prohibiting or restricting the distribution of the Units is made, or proceedings are announced, commenced or threatened for the making of any such order, 15 16 by any securities commission or exchange or any other competent authority and has not been rescinded, revoked or withdrawn; 12.1.2 any inquiry, action, suit or investigation (whether formal or informal) or other proceeding in relation to the Issuer or any of its respective directors or executive officers is announced, commenced or threatened by any securities commission or exchange or by any other competent authority if, in the opinion of the Agent, the announcement, commencement or threatening thereof adversely affects the distribution of the Units; 12.1.3 the Issuer is in material breach of, default under, or non-compliance with any representation, warranty, term or condition of this Agreement; 12.1.4 the Units cannot, in the opinion of the Agent, be profitably marketed due to the state of the financial markets; 12.1.5 there shall have occurred any material change from the disclosures set forth in the Offering Documents, as determined by the Agent in its sole discretion, in the business, operations, capital or condition (financial or otherwise) or the results of operations of the Issuer and its subsidiaries (taken as a whole), or its properties, assets, liabilities or obligations (absolute, accrued, contingent or otherwise); 12.1.6 there should develop, occur or come into effect or existence any event, action, state, condition or financial occurrence, or any catastrophe, of national or international consequence, any action, law or regulation, or any other occurrence of any nature whatsoever, which, in the sole opinion of the Agent, seriously adversely affects or involves, or may seriously adversely affect or involve, the financial markets or the business, operations or affairs of the Issuer and its subsidiaries (taken as a whole), the distribution of the Units, or a Subscriber's decision to purchase the Units, even if the Subscriber has already executed a Subscription Agreement for all or a portion of the Units offered; or 12.1.7 the Agent is not satisfied with the results of its due diligence investigations relating to the Issuer and its subsidiaries. 12.2 The right of the Agent to terminate its obligations under this Agreement is in addition to such other remedies as it has or may have in respect of any default, act or failure to act of the Issuer in respect of any of the matters contemplated by this Agreement. 13. Garnishing Orders. ----------------- 13.1 If at any time before the completion of any Closing of the Private Placement the Agent receives a garnishing order or other form of attachment purporting to attach or garnish a part or all of the sale price of any of the Units, the Agent may pay the amount purportedly attached or garnished into court. 13.2 Any payment by the Agent into court contemplated in this Agreement is deemed to have been received by the Issuer as payment by the Agent against the sale price of the Units to 16 17 the extent of the amount paid, and the Issuer is bound to issue and deliver the Units proportionately to the amount paid by the Agent. 13.3 The Agent is not bound to ascertain the validity of any garnishing order or attachment, or whether in fact it attaches any monies held by the Agent, and the Agent may act with impunity in responding to any garnishing order or attachment by payment into court. 13.4 The Issuer shall release, indemnify and save harmless the Agent in respect of all damages, costs, expenses or liabilities arising from any acts of the Agent under this Section 13. 14. Notices. ------- 14.1 Any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified by hand or by professional courier service, or by telecopier via the telefax numbers indicated below. Any notice shall be addressed to the party to be notified at the addresses indicated below: In the case of the Issuer: MicroTel International, Inc. 4290 East Brickell Street Ontario, California 91761, U.S.A. Attention: Carmine T. Oliva Telefax: (909) 391-4558 with a copy to: Gallagher, Briody & Butler 212 Carnegie Center, Suite 402 Princeton, New Jersey 08540, U.S.A. Attention: Thomas P. Gallagher, Esq. Telefax: (609) 452-6000 In the case of the Agent: Yorkton Securities Inc. 10th Floor, Bentall 4 1055 Dunsmuir Street Vancouver, British Columbia Canada V7X 1L4 Attention: Gordon Keep Telefax: (604) 640-0512 with a copy to: Miller & Holguin 1801 Century Park East Seventh Floor Los Angeles, California 90067, U.S.A. Attention: J. Brad Wiggins, Esq. Telefax: (310) 557-2205 14.2 The Issuer and the Agent may change their respective addresses for notice by notice given in the manner referred to in this Section, upon ten (10) days' advance notice. 17 18 15. Miscellaneous. ------------- 15.1 Survival. The representations and warranties made in this Agreement shall be true at the time of each Closing as though they were made at the time of such Closing, and they shall survive the completion of the transactions contemplated under this Agreement for one year thereafter. The provisions of this Agreement which, by their terms, require performance by a party to this Agreement subsequent to any Closing of the Private Placement shall survive such Closing. 15.2 Further Assurances. The parties hereto shall execute and deliver all such further documents and instruments and do all such acts and things as a party may, either before or after each Closing of the Private Placement, reasonably require in order to carry out the full intent and meaning of this Agreement. 15.3 Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the Issuer, the Agent, and their respective successors and representatives. This Agreement and its conditions and provisions are intended to be and are for the sole and exclusive benefit of the parties to it and their respective successors and representatives, and not for the benefit of any other person, firm or corporation unless expressly stated otherwise. This Agreement may not be assigned by any party hereto without the prior written consent of both of the parties hereto. 15.4 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 15.5 Execution and Delivery. The parties hereto may rely on delivery by facsimile machine of an executed copy of this Agreement, and acceptance by any party of such facsimile copy shall be equally effective to create a valid and binding agreement between the parties in accordance with the terms hereof. 15.6 Governing Laws. This Agreement shall in all respects be governed by and construed in accordance with the laws of the State of California applicable to contracts between California residents entered into and to be performed entirely within the State of California. 15.7 Titles. The titles of the sections and subsections of this Agreement are for the convenience of reference only and are not to be considered in construing this Agreement. 15.8 Entire Agreement. This Agreement constitutes the entire agreement and understanding between the parties with respect to the subject matters herein, and supersedes and replaces any prior agreements and understandings, whether oral or written, between them with respect to such matters. Each party to this Agreement acknowledges that no representation, inducement, promise or agreement, whether written or oral, has been made by any party, or anyone acting on behalf of any party, which is not embodied or referenced herein, and that no other agreement, statement, or promise not contained or referenced in this Agreement shall be valid or binding. 15.9 Amendment. Any modification of this Agreement will be effective only if it is in writing and signed by all parties to this Agreement. 18 19 15.10 Waiver. Any party to this Agreement may waive compliance by the other with any of the terms, provisions and conditions set forth in this Agreement; provided, however, that any such waiver must be in a writing specifically setting forth the provisions thus waived and may not result in a material change to any of the material terms of the Private Placement unless such change is consented to by each Subscriber participating in the Private Placement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year herein above first written. MICROTEL INTERNATIONAL, INC. By: /s/ Carmine T. Oliva - ---------------------- ------------------------------------- Title: President/CEO YORKTON SECURITIES INC. By: /s/ Gordon B. Keep - ---------------------- ------------------------------------- Title: V.P. Corporate Finance 19 20 SCHEDULE A ---------- [None] 20 EX-10.17 7 FORM OF SUBSCRIPTION AGREEMENT 1 Exhibit 10.17 THE SECURITIES TO WHICH THIS AGREEMENT RELATES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS ("STATE LAWS") OR ANY SECURITIES LAWS OF JURISDICTIONS OUTSIDE OF THE UNITED STATES, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE UNITED STATES OR TO A "U.S. PERSON" (AS DEFINED HEREIN) EXCEPT (1) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT COVERING THE SECURITIES, (2) UPON DELIVERY TO THE COMPANY OF AN OPINION OF U.S. COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THE SECURITIES MAY BE TRANSFERRED WITHOUT REGISTRATION PURSUANT TO (A) RULE 144, RULE 144A, OR RULE 904 OF REGULATION S PROMULGATED UNDER THE SECURITIES ACT OR (B) ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT, OR (3) AS OTHERWISE PERMITTED UNDER THE TERMS OF SUBSECTION 10.2 OF THIS AGREEMENT. SUBSCRIPTION AGREEMENT Dated for reference purposes March 21, 1997 TO: MICROTEL INTERNATIONAL, INC. PERSONAL & CONFIDENTIAL 2040 Fortune Drive, Suite 102 San Jose, California 95131 1. SUBSCRIPTION FOR UNITS. The undersigned (the "Subscriber") hereby irrevocably subscribes for and agrees to purchase from Microtel International, Inc. (the "Company"), subject to the terms and conditions set forth in this Subscription Agreement, units (the "Units") consisting of one share ("Share") of $.0033 par value common stock of the Company (the "Common Stock") and a one-quarter non-transferable share Purchase Warrant ("Warrant") for the total purchase price set forth next to the Subscriber's name on page 14 hereof (the "Total Purchase Price"). Each full Warrant shall entitle the holder to purchase one (1) additional share of the Company's Common Stock at a price equated to a 30% premium to the ten day moving average in market price of the Company's Common Stock for the ten days immediately preceding the date of contracting under this Subscription Agreement. The Warrants are subject to redemption under certain circumstances as set forth in the Warrant Agreement. All dollar amounts set forth herein refer to U.S. dollars, unless otherwise indicated. The Units form part of a larger private placement (the "Private Placement") of Units for an aggregate minimum offering price of $5,000,000 and an aggregate maximum offering price of $10,000,000. The Units are being sold by the Company pursuant to an agency agreement dated for reference purposes March 21, 1997 (the "Agency Agreement") between Yorkton Securities Inc. (the "Agent") and the Company pursuant to which the Agent has agreed to act as the sole and exclusive agent of the Company to solicit offers to purchase the Units on a best efforts basis. Subject to the terms hereof, this subscription will be effective upon its acceptance by the Company. 2. NUMBER OF UNITS. The number of Units subscribed for herein shall be determined by dividing the Total Purchase Price by the Price Per Share as defined in Section 3 hereof. 3. PRICE PER UNIT. The price per Unit ("Price Per Unit") shall be equal to 80% of the average closing bid price of the Company's Common Stock as it trades on the Nasdaq SmallCap Market for the 10 trading days immediately preceding the date of contracting under this subscription agreement, provided, however, that in no event will the Price Per Unit based on this calculation be less than $2.50 or more than $3.50. 4. SUBSCRIPTION. The Subscriber must deliver to the Agent a fully completed and executed copy of this Subscription Agreement, including completed registration and delivery instructions appearing after the Subscriber's signature hereto. 2 5. PAYMENT. Together with this Subscription Agreement, the Subscriber must deliver to the Agent the Total Purchase Price of the Units subscribed for hereunder, paid by certified check or bank draft payable to the Agent or payable in such other manner as may be specified by the Agent. 6. TERMS OF CLOSING. 6.1 Closing. Provided that the Agent has received Private Placement subscriptions equaling or exceeding the aggregate minimum offering price of $5,000,000 and all other terms and conditions of this Subscription Agreement have been satisfied, the closing of the Private Placement (the "Closing") shall take place on such date or dates as the Company and the Agent shall mutually agree (the "Closing Date"). The Closing shall be held at the place or places provided for in the Agency Agreement. At the Closing, the proceeds of the Private Placement will be delivered to the Company (net of amounts due to the Agent under the terms of the Agency Agreement) and certificates (the "Certificates") representing the Units (which shall contain all legends required under the terms of this Subscription Agreement) will be delivered to the Agent for the benefit of the Subscriber. 6.2 Failure to Close. In the event that the Agent does not receive the aggregate minimum offering price required to close the Private Placement, or any other condition to the Closing is not satisfied or waived in accordance with the terms of this Subscription Agreement, the Total Purchase Price of the Units, exclusive of any interest thereon, shall promptly be returned by the Agent to the Subscriber. 7. SUBSCRIBER'S REPRESENTATIONS, WARRANTIES AND COVENANTS. The Subscriber hereby represents, warrants and covenants to the Company and the Agent as of the date of this Subscription Agreement and at the Closing that: 7.1 Investment Intent. The Subscriber's acquisition of the Units is solely for the Subscriber's own account, for investment, and not with a view to, or to offer or sell for an issuer in connection with, any distribution thereof, and the Subscriber has no present intention of selling or distributing any of the Units. The Subscriber has no contract, arrangement or understanding with the Company, the Agent, or any other person to participate in a distribution of the Units, is not an affiliate of a person which has such a contract, arrangement or understanding, and will not act on behalf of any of the foregoing persons in any offer or sale of the Units. The Subscriber is acquiring the Units in the ordinary course of its business. 7.2 Access to Information. The Subscriber has received a copy of the offering memorandum for the Private Placement (the "Offering Memorandum") and each of the following documents, which are attached as Exhibits to the Offering Memorandum, including: (i) the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995, (ii) the Proxy Statement for the Company's Annual Meeting of Stockholders held on August 15, 1996, and (iii) the Company's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 1996 (collectively referred to in this Subscription Agreement as the "Offering Documents"), and, if desired, has sought and obtained from management of the Company such additional information concerning the business, management and financial affairs of the Company as the Subscriber has deemed necessary or appropriate in determining whether or not to purchase the Units. The Subscriber understands and acknowledges that the Agent has been engaged solely to act as placement agent for the offering of the Units and has not independently verified any of the information contained in the Offering Documents and assumes no responsibility for the accuracy or completeness thereof. The Subscriber acknowledges that it has not relied on the Agent or any person affiliated or associated with the Agent in connection with its investigation of the information in the Offering Documents or in connection with its investment decision. 2 3 7.3 Accredited Investor; Knowledge and Experience. The Subscriber is an "accredited investor," as that term is defined in Rule 501(a) under the Securities Act, a copy of which the undersigned has read and understands. The Subscriber has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in the Units, and it is able to bear the economic risk of losing up to the entire amount of its investment therein. Further, the individual executing this Subscription Agreement has such knowledge and experience in financial and business matters that he is capable of utilizing the information made available to him in connection with the offering of the Units, of evaluating the merits and risks of an investment in the Units, and of making an informed investment decision with respect to the Units, including assessment of the risk factors set forth in the Offering Documents. 7.4 Suitability. The Subscriber has carefully considered, and has, to the extent the Subscriber deems it necessary, discussed with the Subscriber's own professional legal, tax and financial advisers the suitability of an investment in the Units for the Subscriber's particular tax and financial situation, and the Subscriber has determined that the Units are a suitable investment. 7.5 Private Offering. The offer to sell the Units was directly communicated to the Subscriber by the Agent. At no time was the Subscriber presented with or solicited by any leaflet, newspaper or magazine article, radio or television advertisement, or any other form of general advertising or solicited or invited to attend a promotional meeting otherwise than in connection and concurrently with such communicated offer. 7.6 Compliance with Regulation S. The Subscriber acknowledges that a condition to the sale of the Units to the Subscriber is that the Company and the Agent must be satisfied that registration under the Securities Act is not required by virtue of compliance with Regulation S thereunder. 7.7 No Directed Selling Efforts. The Subscriber is not aware of any Directed Selling Efforts (as hereinafter defined) having been made in the United States with respect to the Units by the Company, the Agent, their respective affiliates, or any person acting on behalf of any of the foregoing. In addition, the Subscriber, its affiliates, and persons acting on behalf of the foregoing have not made and will not make, any Directed Selling Efforts in the United States with respect to the Units. For purposes of this Subscription Agreement, "Directed Selling Efforts" include any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for the Units, including, but not limited to, the placement of an advertisement in a publication with a general circulation in the United States that refers to the offering of the Units, the mailing of promotional materials to persons located in the United States or the holding of promotional meetings or seminars in the United States. 7.8 Offshore Transaction. The offer and sale of the Units to the Subscriber qualifies as an Offshore Transaction. For purposes of this Subscription Agreement, the term "Offshore Transaction" means that: (1) The Subscriber was outside the United States at the time the Units were offered for sale to the Subscriber; and (2) The Subscriber was outside the United States at the time the Subscriber originated the buy order for the Units, including, but not limited to, the time when the Subscriber signed and delivered this Subscription Agreement and otherwise subscribed for or offered or agreed to purchase the Units. 3 4 In this Subscription Agreement, the term "United States" means the United States of America, its territories and possessions, any State of the United States, and the District of Columbia. Notwithstanding the foregoing definition of "Offshore Transaction," the offer and sale of the Units to the Subscriber shall not constitute an "Offshore Transaction" if the Subscriber is acquiring the Units for the account or benefit of any specifically targeted, identifiable group of U.S. citizens abroad, such as members of the U.S. armed forces serving overseas, but shall constitute an "Offshore Transaction" if the Subscriber is a person excluded from the definition of "U.S. Person" pursuant to Section 7.9(2)(f) of this Subscription Agreement or is a person holding an account excluded from the definition of "U.S. Person" pursuant to Section 7.9(2)(a) of this Subscription Agreement, solely in its capacity as a holder of such an account. 7.9 Non-U.S. Person. The Subscriber is not a U.S. Person, as such term is defined below, and is not acquiring the Shares for the account or benefit of any U.S. Person. (1) Definition of U.S. Person. For purposes of this Subscription Agreement, the term "U.S. Person" means: (a) Any natural person resident in the United States; (b) Any partnership or corporation organized or incorporated under the laws of the United States; (c) Any estate of which any executor or administrator is a U.S. Person; (d) Any trust of which any trustee is a U.S. Person; (e) Any agency or branch of a foreign entity located in the United States; (f) Any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. Person; (g) Any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the United States; and (h) Any partnership or corporation if organized or incorporated under the laws of any foreign jurisdiction, and formed by a U.S. Person principally for the purpose of investing in securities not registered under the Securities Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a) under the Securities Act), who are not natural persons, estates or trusts. (2) Exclusions from Definition. Notwithstanding the foregoing definition of "U.S. Person": (a) Any discretionary account or similar account (other than an estate or trust) held for the benefit or account of a non-U.S. Person by a dealer or other professional fiduciary organized, incorporated, or (if an individual) resident in the United States shall not be deemed a U.S. Person. 4 5 (b) Any estate of which any professional fiduciary acting as executor or administrator is a U.S. Person shall not be deemed a U.S. person if an executor or administrator of the estate who is not a U.S. Person has sole or shared investment discretion with respect to the assets of the estate, and the estate is governed by foreign law. (c) Any trust of which any professional fiduciary acting as trustee is a U.S. Person shall not be deemed a U.S. Person if a trustee who is not a U.S. Person has sole or shared investment discretion with respect to the trust assets, and no beneficiary of the trust (and no settlor if the trust is revocable) is a U.S. Person. (d) An employee benefit plan established and administered in accordance with the law of a country other than the United States and customary practices and documentation of such country shall not be deemed a U.S. Person. (e) Any agency or branch of a U.S. Person located outside the United States shall not be deemed a U.S. Person if the agency or branch operates for valid business reasons, and the agency or branch is engaged in the business of insurance or banking and is subject to substantive insurance or banking regulation, respectively, in the jurisdiction where located. (f) The International Monetary Fund, the International Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the United Nations, and their agencies, affiliates and pension plans, and any other similar international organizations, their agencies, affiliates and pension plans shall not be deemed U.S. Persons. 7.10 No Fairness Determination. The Subscriber understands that no governmental or other agency has reviewed or approved the terms of the Subscriber's investment in the Units or the accuracy or adequacy of the Offering Documents, nor has any such agency made any finding or determination as to the fairness of an investment in the Units or made any recommendation or endorsement of the Units. 7.11 Truth and Accuracy. All representations and warranties made by the Subscriber in this Subscription Agreement are true and accurate as of the effective date of this Subscription Agreement and shall be true and accurate as of the Closing Date. If such representations and warranties shall not be true and accurate in any respect, the Subscriber will, prior to the Closing, give written notice of such fact to the Company specifying which representations and warranties are not true and accurate and the reasons therefor. 7.12 Authority. The individual executing and delivering this Subscription Agreement on behalf of the Subscriber has been duly authorized and is duly qualified to execute and deliver this Subscription Agreement on behalf of the Subscriber in connection with the purchase of the Units; the signature of such individual is binding upon the Subscriber; the Subscriber is duly organized and subsisting under the laws of the jurisdiction in which is was organized; and the Subscriber was not formed for the specific purpose of acquiring the Units. 7.13 No Violation. The execution and delivery of this Subscription Agreement and the consummation of the transactions or performance of the obligations contemplated by this Subscription Agreement do not and will not violate any term of the Subscriber's charter or bylaws and will not result 5 6 in a breach of any term of, or constitute a default under, any statute, indenture, mortgage, other agreement or instrument to which the Subscriber is a party or by which it is bound, or any order, writ, judgment or decree. 7.14 Enforceability. The Subscriber has duly executed and delivered this Subscription Agreement and (subject to acceptance by the Company) it constitutes a valid and binding agreement of the Subscriber enforceable in accordance with its terms against the Subscriber, except as such enforceability may be limited by principles of public policy, and subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. 7.15 Acceptance by Company Required. The Subscriber acknowledges that this Subscription Agreement is not enforceable by the Subscriber unless it has been accepted by the Company. 7.16 Notice of Company's Acceptance Waived. The Subscriber waives any requirement for the Company to communicate its acceptance of this Subscription Agreement to the Subscriber. 7.17 Reliance on Own Advisers. In connection with the Subscriber's investment in the Units, the Subscriber has not relied upon the Company or the Agent or their respective legal and tax advisers for legal or tax advice, and has, if desired, in all cases sought the advice of the Subscriber's own personal legal counsel and tax advisers. 7.18 Confidentiality of Information. The Subscriber acknowledges and understands that certain information given in the Offering Memorandum has not yet been disclosed to the public, and the Subscriber agrees not to disclose such information or to trade in the securities of the Company until such information has been publicly disclosed by the Company. 8. COMPANY'S REPRESENTATIONS, WARRANTIES AND COVENANTS. The Company hereby represents, warrants and covenants as of the date of this Subscription Agreement and at the Closing that, except as otherwise disclosed in the Offering Documents: 8.1 Organization. The Company has been duly incorporated and organized and is validly existing in good standing under the laws of the State of Delaware. 8.2 Good Standing. The Company and its subsidiaries are duly qualified to do business as foreign corporations in good standing in those jurisdictions which require such qualification except to the extent that failure to so qualify would not have a material adverse effect on the Company. 8.3 Authority. The Company has corporate power and authority to enter into and perform this Subscription Agreement, to own its own properties and assets, and to carry on its business as it is currently being conducted. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Subscription Agreement by the Company and the performance of all of the Company's obligations hereunder has been duly taken. 8.4 Enforceability. This Subscription Agreement, when executed and delivered by the Company and duly authorized, executed and delivered by the Subscriber, will be a binding obligation on the Company, enforceable in accordance with its terms, except as may be limited by principles of public policy, and subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. 6 7 8.5 No Violation. The execution and delivery of this Subscription Agreement and the consummation of the transactions or performance of the obligations contemplated by this Subscription Agreement do not and will not violate the Company's charter or bylaws and will not result in a breach of any term of, or constitute a default under, any statute, indenture, mortgage, other agreement or instrument to which the Company or any of its subsidiaries is or are a party or by which any of them is or are bound, or any order, writ, judgment or decree. 8.6 Actions and Claims. To the best of the Company's knowledge, there are no actions or proceedings of any kind whatsoever outstanding, pending, contemplated or threatened relating to the bankruptcy or insolvency of the Company or any of its subsidiaries. Except as set forth in the Offering Memorandum, to the best of its knowledge, there are no other claims, actions, suits, judgments, investigations or proceedings of any kind whatsoever outstanding, pending or threatened against or affecting the Company, its subsidiaries, or the Company's directors, officers or promoters, at law or in equity or before or by any federal, state, municipal or other governmental department, commission, board, bureau or agency of any kind whatsoever which could materially affect its business or financial condition and, to the best of its knowledge, there is no basis therefor. 8.7 Disclosure. The Company's Offering Documents do not, as of the respective dates thereof, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they have been made, not misleading. 8.8 Authorized and Validly Issued Shares. The authorized and issued capital stock of the Company as of the dates set forth in the Offering Documents is as disclosed in the Offering Documents, and the issued and outstanding shares of Common Stock of the Company are fully paid and non-assessable. The Company has sufficient authorized and unissued shares of Common Stock to provide for the issuance and delivery of the Shares and will maintain sufficient authorized and unissued shares of Common Stock to provide for the issuance and delivery of shares of Common Stock upon exercise of the Warrants ("Warrant Shares"). The Shares and the Warrant Shares, when issued in the manner contemplated by the provisions of this Subscription Agreement and the Warrants, will be duly authorized and validly issued and will be fully paid and non-assessable. 8.9 Convertible Securities. Except as set forth in the Offering Memorandum, no securities convertible or exchangeable into Common Stock of the Company or agreements, warrants, options, rights or privileges for the purchase or other acquisition of any unissued securities of the Company are outstanding as of the date hereof. 8.10 Intellectual Property Rights. The Company or its subsidiaries own, possess or have access to adequate rights to use all material patents, patent rights, inventions, trademarks, service marks, trade names, copyrights and proprietary rights necessary for the conduct of its business as described in the Offering Documents; and the Company has no knowledge of any infringement of or conflict with rights of others, or any claims thereof, with respect to any patents, patent rights, inventions, trademarks, service marks, trade names, copyrights or other proprietary rights, the effect of which infringement, conflict or claims would be materially adverse to the Company. 8.11 Financial Statements. The financial statements included in the Offering Documents (the "Financial Statements") are true and correct in all material respects and present fairly and accurately the financial position and results of the operations of the Company and its subsidiaries for the periods shown therein, and the Financial Statements have been prepared in accordance with accounting 7 8 principles generally accepted in the United States applied on a consistent basis except for normal year-end adjustments. 8.12 Change in Circumstances. Except as disclosed in the Offering Memorandum, since September 30, 1996 there has not been any adverse material change of any kind whatsoever in the financial position or condition of the Company or of any of its subsidiaries, or any damage, loss or other change of circumstances of any kind whatsoever materially affecting the business or assets of the Company or of any subsidiaries or the right or capacity of the Company or of any subsidiaries to carry on their business. 8.13 Defaults. Since September 30, 1996, neither the Company nor any of its subsidiaries has defaulted, or is currently in default (i) with respect to the payment of interest or principal on any material indebtedness of the Company or its subsidiaries, or (ii) under any material contract to which the Company or any of its subsidiaries is a party. 8.14 Stop Orders. No order prohibiting the sale of the Company's securities has been issued against the Company or, to Company's knowledge, its directors, officers or promoters, and no proceedings for this purpose have been instituted, are pending, or, to its knowledge, contemplated or threatened. 8.15 Transfer Agent. American Securities Transfer, Inc., having its principal office in Lakewood, Colorado, has been duly appointed as the transfer agent for the Company's Common Stock. 8.16 Domestic Reporting Company. The Company is a "domestic issuer," as such term is defined in Rule 902 of Regulation S, and has a class of securities registered pursuant to Section 12(b) or 12(g) of the United States Securities Exchange Act of 1934, as amended (the "Exchange Act") or is required to file reports pursuant to Section 15(d) of the Exchange Act. 8.17 Exchange Act Reports. At the time of commencement of the Private Placement, the Company had filed all the material required to be filed pursuant to Section 13(a) or 15(d) of the Exchange Act for a period of at least the twelve months immediately prior thereto, and the Company has since remained, and continues to remain, current in satisfying such filing obligations. 8.18 No Directed Selling Efforts. The Company, its affiliates, and persons acting on behalf of the foregoing have not made and will not make any Directed Selling Efforts in the United States with respect to the Shares. 8.19 Use of Proceeds. The Company intends to use the net proceeds of the Private Placement for working capital purposes, primarily to assist the Company in the development, marketing and distribution of its telephone testing and modem products as well as the development of its contract manufacturing operations as well as other products, as more fully described in the Offering Memorandum. 8.20 No Stockholder Approval. The Company is not required under the National Association of Securities Dealers Bylaws to obtain stockholder approval prior to offering or selling the Shares in the Private Placement. 9. REGISTRATION RIGHTS. The Company agrees, on the following terms and subject to the following conditions, to register under the Securities Act the resale of all of the Shares purchased by the Subscriber in the Private Placement, and all Shares issuable pursuant to the exercise of the Warrants, any securities issued or issuable by way of stock dividend or any other distribution with respect to or in 8 9 exchange for, or in replacement of, such Shares, by stock split, or in connection with a combination of shares, recapitalization, merger, consolidation, amalgamation or other reorganization (collectively, the "Registrable Securities"), at the Company's own expense, with the exception of any legal and advisory fees or expenses incurred by the Subscriber in connection with the registration. 9.1 Filing of Registration Statement. The Company shall prepare and file with the United States Securities and Exchange Commission ("SEC") not later than 60 days after the Closing Date a registration statement on an appropriate form (the "Registration Statement") for registration under the Securities Act of the resale of the Registrable Securities. 9.2 Information. In connection with the preparation of the Registration Statement: (1) The Subscriber shall furnish to the Company all information reasonably requested by the Company (including, for example, information regarding the Subscriber's intended method of disposition of the Registrable Securities) for inclusion in the Registration Statement and response to SEC comments and questions. (2) As the Subscriber may be deemed a statutory underwriter of any Shares sold by the Subscriber under the Registration Statement, the Company shall give the Subscriber and its legal counsel and accountants such access to copies of the Company's records and documents and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be reasonably necessary, in the opinion of the Subscriber or its legal counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 9.3 Effectiveness of Registration Statement. The Company shall use its best efforts to cause the Registration Statement to become effective within 150 days after the Closing Date (but if not effective within such period, the Company shall continue to use its best efforts to cause the Registration Statement to become effective as soon as possible thereafter) and to keep the Registration Statement effective thereafter until the earlier of (i) the date on which all Registrable Securities have been resold pursuant to the Registration Statement or otherwise resold without restriction under the Securities Act, or (ii) the date on which is ended the two-year period referenced in Rule 144(k) under the Securities Act or any successor rule or subsection relating to the resale of "restricted securities" by "non- affiliates" of an issuer, as such terms are defined in the Securities Act and the rules and regulations promulgated thereunder. 9.4 Amendments and Supplements. The Company shall prepare and file with the SEC such amendments and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of the Registrable Securities. 9.5 Copies of Prospectuses. The Company shall furnish to the Subscriber such numbers of copies of prospectuses or prospectus documents conforming with the requirements of the Securities Act as the Subscriber may reasonably request in order to facilitate the disposition of Registrable Securities owned by the Subscriber. 9.6 Blue Sky Registrations. The Company shall use its best efforts to register and qualify the Registrable Securities under the state securities or Blue Sky laws ("State Laws") of such jurisdictions as the Subscriber reasonably requests. 9 10 9.7 Quiet Periods. The Subscriber agrees that, upon its receipt of any notice from the Company of the happening of any event which makes any statement made in the Registration Statement, the prospectus or any document incorporated therein by reference, untrue in any material respect or which requires the making of any changes in the Registration Statement, the prospectus or any document incorporated therein by reference, in order to make the statements therein not misleading in any material respect, the Subscriber will forthwith discontinue disposition of Registrable Securities under the prospectus related to the Registration Statement until the Company provides the Subscriber with copies of the supplemented or amended prospectus or prospectus documents, or until the Subscriber is advised in writing by the Company that the use of the prospectus may be resumed. The Company agrees to provide the Subscriber with such copies of the supplemented or amended prospectus or prospectus documents, or notice that use of the prospectus may be resumed, as soon as reasonably practicable. 9.8 Trading Market. The Company covenants to use its best efforts to maintain a continuous trading market for its Common Stock on the Nasdaq SmallCap Market or National Market System or a United States national securities exchange throughout the period that the registration rights afforded by this Section 9 remain in effect. 9.9 Compliance with Anti-Manipulation Rules. The Subscriber agrees that, with respect to the offering for resale of the Registrable Securities, the Subscriber will comply with Rules 10b-6 and 10b-7 promulgated under the Exchange Act and such other or additional anti-manipulation rules then in effect (the "Anti-Manipulation Rules") until such offering has been completed. The Company also agrees to comply with the Anti-Manipulation Rules with respect to the offering for resale of the Registrable Securities until such offering has been completed. 9.10 Indemnification. To the extent permitted by law, the Company agrees to indemnify and hold harmless the Subscriber and its affiliates and agents, and the Subscriber agrees to indemnify and hold harmless the Company and its affiliates and agents: (1) against any losses, claims, damages and liabilities and any legal or other costs and expenses reasonably incurred by such indemnified parties in connection with investigating or defending any such loss, claim, damage liability, or action to which such parties may become subject under the Securities Act or other federal or state law, insofar as such losses, claims, damages, liabilities, costs or expenses (or actions in respect thereof) did not arise out of and were not based upon written information furnished by such parties expressly for use in the Registration Statement; and (2) for amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected by the indemnifying party without the prior written consent of the other party to this Subscription Agreement, which consent shall not be unreasonably withheld. 9.11 Enforcement. In the event of a material breach of the terms of this Section 9 by the Company, the Subscriber will be entitled to enforce its rights under this Section 9 specifically (without posting a bond or other security), to recover damages by reason of any breach of any provision hereof, and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach by the Company of the provisions hereof, and that the Subscriber may in its sole discretion apply to a court of competent jurisdiction for specific performance and/or injunctive relief in order to enforce or prevent any violation of the provisions hereof. In addition, upon the occurrence of a material breach by the Company or by the Subscriber of this Section 9, the breaching party shall pay all costs and expenses (including the prevailing party's attorney's fees and 10 11 expenses) reasonably incurred in connection with the preservation and enforcement of such party's rights hereunder. 9.12 Subsequent Holders. Any person who acquires Registrable Securities from the Subscriber in a transaction that is permitted under Section 10 of this Subscription Agreement and that does not result in such person receiving securities which are free of restrictions on transfer in the United States and to U.S. Persons, such person shall be entitled to the benefit of all of the rights and privileges set forth in this Section 9, provided that such person agrees in a writing to the Company to undertake all of the obligations of the Subscriber under this Section 9. 10. RESTRICTIONS ON TRANSFER. 10.1 Securities Act Restrictions and Legend. The Subscriber acknowledges and agrees that: (1) The offer and sale of the Units to the Subscriber have not been registered under the Securities Act or under any State Laws, and therefore may not be transferred without registration under the Securities Act unless an exemption from such registration requirements is available or registration is not required pursuant to Regulation S under the Securities Act. (2) The Subscriber will not offer, sell or otherwise transfer any of the Shares, Warrants or Warrant Shares directly or indirectly except: (a) pursuant to an effective registration statement filed under the Securities Act, as contemplated by Section 9 of this Subscription Agreement; or (b) upon delivery to the Company of an opinion of U.S. counsel reasonably satisfactory to the Company that the Shares may be transferred without registration pursuant to (i) Rule 144, Rule 144A, or Rule 904 of Regulation S promulgated under the Securities Act (which will not be available unless the Company is in default with respect to its obligations pursuant to section 9 hereof) or (ii) any other available exemption from the registration and prospectus delivery requirements of the Securities Act. 10.2 Restrictive Legends. The Subscriber understands and agrees that, although Regulation S does not expressly require the placement of a restrictive legend on the certificates representing the Units, a legend will be placed on the Certificates noting the restrictions on transfer set forth in Subsection 10.1 of this Subscription Agreement in order to help ensure compliance with certain requirements of Regulation S that continue to apply during the applicable restricted period following the Closing. Such legend shall read substantially as follows: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS ("STATE LAWS") OR ANY SECURITIES LAWS OF JURISDICTIONS OUTSIDE OF THE UNITED STATES, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE UNITED STATES OR TO A "U.S. PERSON," AS THAT TERM IS DEFINED IN REGULATION S UNDER THE SECURITIES ACT, EXCEPT (1) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT COVERING THE SECURITIES, OR (2) UPON DELIVERY TO THE COMPANY OF AN 11 12 OPINION OF U.S. COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THE SECURITIES MAY BE TRANSFERRED WITHOUT REGISTRATION PURSUANT TO (A) RULE 144, RULE 144A, OR RULE 904 OF REGULATION S PROMULGATED UNDER THE SECURITIES ACT OR (B) ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT." 11. RELIANCE. The Subscriber understands and agrees that the Company and the Agent and their respective officers, directors, employees and professional advisers may, and will, rely on the accuracy of the Subscriber's representations and warranties in this Subscription Agreement to establish compliance with applicable securities laws. The Subscriber agrees to indemnify and hold harmless all such parties against all losses, claims, costs, expenses and damages or liabilities which they may suffer or incur caused or arising from their reliance on such representations and warranties. 12. APPOINTMENT OF THE AGENT. 12.1 Related Agreements. The Subscriber hereby irrevocably authorizes the Agent to negotiate and settle the form of any other document or agreement to be entered into in connection with this transaction. 12.2 Agency Agreement. The Subscriber hereby acknowledges and agrees that the Agent and the Company may vary, amend, alter or waive, in whole or in part, any provisions of the Agency Agreement in such manner and on such terms and conditions as they may determine, acting reasonably, without affecting in any way the Subscriber's obligations hereunder; provided, however, that the Agent and the Company shall not vary, amend, alter or waive any provision where to do so would result in a material change to any of the material terms of the Private Placement. 12.3 Closing; Termination. The Subscriber hereby acknowledges and agrees that the Agent may waive, in whole or in part, or extend the time for compliance with, any of the conditions for Closing in such manner and on such terms and conditions as the Agent may determine, acting reasonably, without in any way affecting the Subscriber's obligations, and may terminate this Subscription Agreement on behalf of the Subscriber in the event that any condition for Closing has not been satisfied. 13. MISCELLANEOUS. 13.1 Survival. The representations, warranties, covenants and agreements made in this Subscription Agreement shall survive the Closing and shall continue in full force and effect notwithstanding the completion of the issuance of the Units to the Subscriber and notwithstanding any subsequent disposition by the Subscriber of any of Shares or Warrants. 13.2 Assignment. This Subscription Agreement is not transferable or assignable. 13.3 Execution and Delivery of Subscription Agreement. The Company and the Agent shall be entitled to rely on delivery by facsimile machine of an executed copy of this Subscription Agreement, and acceptance by the Company of such facsimile copy shall be equally effective to create a valid and binding agreement between the Subscriber and the Company in accordance with the terms hereof. 12 13 13.4 Execution and Delivery of Other Documents. The Subscriber agrees that it will execute and deliver such other documents as may be necessary or desirable to complete the transactions contemplated hereby. 13.5 Titles and Subtitles. The titles and subtitles of the sections and subsections of this Subscription Agreement are for the convenience of reference only and are not to be considered in construing this Subscription Agreement. 13.6 Severability. The invalidity or unenforceability of any particular provision of this Subscription Agreement shall not affect or limit the validity or enforceability of the remaining provisions of this Subscription Agreement. 13.7 Termination. If, prior to Closing, the Agent exercises its right of termination as contained in the Agency Agreement, this Subscription Agreement and the obligations of the parties hereto (other than the terms of Subsection 6.2 governing the return to the Subscriber of subscription funds, exclusive of interest) are deemed to have terminated as at the effective date of such termination. 13.8 Entire Agreement. This Subscription Agreement constitutes the entire agreement and understanding between the parties with respect to the subject matters herein, and supersedes and replaces any prior agreements and understandings, whether oral or written, between them with respect to such matters. Except as otherwise provided herein, the provisions of this Subscription Agreement may be waived, altered, amended or repealed, in whole or in part, only upon the mutual written agreement of the Company and the Subscriber. 13.9 Counterparts. This Subscription Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. 13.10 Governing Law. This Subscription Agreement is governed by and shall be construed in accordance with the laws of the State of California, except that the authority to award damages (including punitive damages) shall be interpreted under New York law. IN WITNESS WHEREOF, the Subscriber has duly executed this Subscription Agreement as of the date first above mentioned. Total Purchase Price: $______________________ _____________________________________________ Name of Subscriber (please type or print) _____________________________________________ Signature and, if applicable, office _____________________________________________ Street address of Subscriber _____________________________________________ City, state/province, country and postal code of Subscriber 13 14 REGISTRATION AND DELIVERY INSTRUCTIONS (TO BE COMPLETED BY SUBSCRIBER) 1. REGISTRATION. Please register the Subscriber's Share Certificates and Warrants as follows: Name:_________________________________________________________________ Address:______________________________________________________________ 2. DELIVERY. Please deliver the Subscriber's Share Certificates and Warrants to the following address: ______________________________________________________________________ ______________________________________________________________________ ACCEPTANCE The above subscription is hereby accepted by MICROTEL INTERNATIONAL, INC. at San Jose, California on the ___________ day of _____________, 1997. MICROTEL INTERNATIONAL, INC. By:__________________________________ Authorized signing officer 14 EX-10.18 8 EMPLOYMENT ARRANGEMENT W/HENRY MOURAD 1 Exhibit 10.18 HENRY MOURAD'S EMPLOYMENT ARRANGEMENT The following represents the agreement in principle between Henry A. Mourad and MicroTel International, Inc., which is to be memorialized in a definitive employment agreement as soon as possible hereafter. 1) Henry's EMPLOYMENT AGREEMENT dated April 12, 1994 is amended and superceded in its entirety by this arrangement. 2) The new agreement will be between Henry A. Mourad and MicroTel International, Inc. and will employ him as President of CXR Telcom Corporation. 3) The form and substance of the previous agreement (dated April 12, 1994) shall be retained with the following exceptions: a) All references to his service as a member of the Board of Directors (of any company) will be deleted. b) His incentive compensation package will be equivalent to that of other current XIT Corporation subsidiary/division managers. c) The agreement will be inclusive of all benefits Henry will receive and therefore it will be addended to include a $600 per month car allowance that he currently and will continue to receive, and the 'supplemental' medical care benefits Henry has received in past years is discontinued and therefore will be absent from the agreement. The all-inclusive nature of the arrangement will be specifically stated as a provision of the contract. 4) Henry will receive a signing bonus of options to acquire 180,368 shares of the common stock of Microtel at an exercise price of $2.375. The options will be non-qualified, vest immediately, and be exerciseable for a period of 3 years. 5) Incorporated in the determination of the signing bonus are two previously unrecognized (i.e. not given accounting recognition) arrangements between Henry and the Company, and therefore both of these arrangements will be formally voided and cancelled. Specifically, a) that Convertible Promissory Note dated as of June 7, 1993 in the amount of $37,500, and b) that Stock Option Agreement under the CXR Corporation 1986 Incentive Stock Option Plan dated August 23, 1990. Attached are the Employment Agreement dated April 12, 1994 and the 2 agreements noted in item 5) above for reference. AGREED: /s/ Henry A. Mourad /s/ Jack Talan /s/ Carmine T. Oliva - ------------------- ----------------------- -------------------- Henry A. Mourad Jack Talan Carmine T. Oliva Chairman and CEO Chairman and CEO MicroTel International, XIT Corporation Inc.
EX-10.19 9 EMPLOYMENT ARRANGEMENT W/BARRY REIFLER 1 Exhibit 10.19 BARRY E. REIFLER'S EMPLOYMENT ARRANGEMENT The following represents the agreement in principle between Barry E. Reifler and MicroTel International, Inc., which is to be memorialized in a definitive agreement(s) as soon as possible hereafter. 1) Barry's EMPLOYMENT AGREEMENT dated February 9, 1996, as amended on August 15, 1996 (the "Amended Agreement"), will remain in full force and effect as amended by this letter agreement, with the proviso that he has up to 3 months after the consummation of the merger with XIT Corporation (the "Merger") in which to make a determination as to whether he deems the change in control to be an adverse change in employment circumstances. 2) Barry will serve MicroTel International, Inc. as its Chief Financial Officer under the same conditions and terms of the Amended Agreement with the following amendments and understandings: a) Base compensation will be increased to $150,000 per year effective with the date of the Merger. b) The severance provisions will be amended to provide the benefits provided for in paragraph 15 of the Amended Agreement as if he had triggered the provision immediately upon the change in control (i.e. based on an annual salary of $125,000 and covering his current equity position prior to this new employment arrangement). c) Although no contractual revision is necessary regarding the following, it is expressly understood that expenses will be paid for or reimbursed explicitly for items of the same nature as were provided during Barry's tenure as CFO pre-merger when corporate headquarters were located in San Jose, CA., including (by way of illustration and not limited to) a corporate apartment and operating costs of his personal vehicle located in California used for travel while at corporate headquarters. 3) Barry will receive a signing bonus of non-qualified options to acquire 150,000 shares of common stock of MicroTel International, Inc. at an exercise price $2.375 per share. The options will be issued pursuant to the Company's S-8, if amended to be used for resale purposes, or the underlying shares will be accorded piggyback registration rights. The options will vest ratably on a monthly basis over a six (6) month period beginning six (6) months and one day after the effective date of the merger, will be exercisable for a period of 3 years, and those vested will survive termination. Attached are the Employment Agreement dated February 9, 1996 and Amendment No. 1 thereto dated August 15, 1996 for reference. AGREED: /s/ Barry E. Reifler /s/ Jack Talan /s/ Carmine T. Oliva - -------------------- -------------------- --------------------- Barry E. Reifler Jack Talan Carmine T. Oliva Chairman and CEO Chairman and CEO MicroTel International, XIT Corporation Inc.
EX-21.1 10 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES OF MICROTEL INTERNATIONAL, INC. 1. XIT Corporation 4290 E. Brickell Street Ontario, CA 91761-1571 2. XCEL Arnold Circuits, Inc. 4290 E. Brickell Street Ontario, CA 91761-1571 3. HyComp, Inc. 165 Cedar Hill Street Marlborough, MA 01752 EX-23.1 11 CONSENT OF BDO SEIDMAN, LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS MicroTel International, Inc. San Jose, California We hereby consent to the incorporation by reference in the Prospectuses constituting a part of the Registration Statement Nos. 33-22518, 333-12567 and 33-77926 on Form S-8 of our report dated April 14, 1997 relating to the consolidated financial statements and schedule of MicroTel International, Inc. (formerly CXR Corporation) appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. BDO Seidman, LLP San Francisco, California April 15, 1997 EX-23.2 12 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-22518, 333-12567 and 33-72926 of MicroTel International, Inc. on Form S-8 of our report dated August 31, 1994 (November 18, 1994 as to paragraphs two through four in Note 2), appearing in this Annual Report on Form 10-K of MicroTel International, Inc. (formerly CXR Corporation) for the year ended December 31, 1996. DELOITTE & TOUCHE LLP San Jose, California March 26, 1996 EX-27 13 FINANCIAL DATA SCHEDULE
5 MICROTEL INTERNATIONAL, INC. FINANCIAL DATA SCHEDULE YEAR ENDED DECEMBER 31, 1996 1,000 YEAR DEC-31-1996 DEC-31-1996 271 0 3,122 186 3,004 6,698 2,787 2,261 9,319 6,000 36 0 0 10 2,766 9,319 16,303 16,303 10,819 10,819 1,817 (175) 319 (4,682) (85) (4,597) 0 0 0 (4,597) (1.65) (1.65)
-----END PRIVACY-ENHANCED MESSAGE-----